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Tories’ TFSA promise would mainly benefit the wealthy: report

Bill Curry / Globe and Mail

A plan to double the amount people can put in a tax-free savings account is facing new criticism that – like income splitting – it would benefit mainly the most well-off Canadians.

Rhys Kesselman, a professor at Simon Fraser University who holds the Canada Research Chair in public finance, is releasing a report on Tuesday that says most people – except very high earners, some older workers and retirees – are already unable to contribute the maximum, currently $5,500.

“The proposed doubling of the TFSA limits would, over the long run, be of highly disproportionate benefit to top earners and wealth holders and of little benefit to the great majority of workers,” Dr. Kesselman says in a paper for the SFU School of Public Policy to be published on Tuesday. A shorter version will be released simultaneously by the left-leaning Broadbent Institute.

The Globe and Mail obtained advance copies of the reports.

Doubling the annual TFSA contribution limit and launching an adult fitness tax credit are the two remaining tax cut promises from the 2011 Conservative election platform that have not been implemented. The contribution limit was $5,000 when the promise was made. It is not clear what the new limit would be.

Finance Minister Joe Oliver has not said whether he will deliver on the promises in his 2015 budget, the last one before an expected election in the fall. His office declined to clarify on Monday. Economists have said the drop in oil prices over the past year has left the government with virtually no room to cut taxes or announce new spending and still forecast a balanced budget in the upcoming year.

While the initial annual cost of doubling the TFSA would be relatively small, the lost annual tax revenue would grow to about $15-billion within 40 or 50 years, Dr. Kesselman says.

“Like a little baby who looks cuddly and cute, this proposed initiative would grow up to be the hulking teenager who eats everyone out of house and home,” the SFU report states.

Dr. Kesselman co-wrote a 2011 paper for the C.D. Howe Institute – which generally has a centrist or fiscally conservative perspective – that said income splitting would mainly benefit the well-off.

Former finance minister Jim Flaherty repeated that concern, and the government took some of the paper’s criticisms under consideration. The plan allows higher-earning taxpayers to transfer some of their income to a spouse in a lower tax bracket. The final version of the tax break released last year caps the tax gain at $2,000 per family.

In his latest paper, Dr. Kesselman says doubling the annual TFSA limit would have a worse impact than income splitting.

The report calls the TFSA promise the “sleeping twin” of income-splitting that has received comparatively little debate.

“The gap in scrutiny is surprising in that the two siblings – born at the same time on the Conservative Party of Canada’s 2011 election platform – are remarkably similar in their genetic deficiencies,” the paper states.

A TFSA allows Canadians to earn interest and investment income tax free, and money can be withdrawn without a penalty. Unlike a registered retirement savings plan – which defers tax on contributions until they are withdrawn – contributions to a TFSA have already been taxed.

Advisers often recommend a TFSA rather than RRSPs as a retirement savings vehicle for lower-income Canadians. For middle-income Canadians who expect to be in a lower income bracket in retirement, saving through an RRSP is often preferred.

The Parliamentary Budget Officer is releasing a report on Tuesday that will examine many of these issues.

Dr. Kesselman’s report says the gains for higher-income Canadians from raising the TFSA limit could be limited by imposing a ceiling of about $800,000, so that no further contributions could be made once the balance reaches that amount.