Increasing TFSA contribution limits would be a ‘ticking time bomb,’ founder warns

Garry Marr / Financial Post

The two men who might be considered the fathers of tax-free savings accounts in Canada, now worth more than $132 billion, appear to be in disagreement over what happens next to their brainchild.

Jonathan Rhys Kesselman, who co-authored a report back in 2001 with Finn Poschmann, vice-president of policy analysis at the C.D. Howe Institute, is suggesting it’s time to rein in the accounts and not actually increase allowable contributions.

The ruling Tories have pledged to double annual limits once the budget is balanced. The annual allowable TFSA contribution was $5,000 when it was introduced in 2009, but the dollar amount is indexed to inflation and is now $5,500.

Speculation is growing an announcement will be made in the next budget, expected in April. It’s unclear whether the previous pledge by the Tories means the annual limit would climb to $10,000 or $11,000.

Mr. Kesselman, a professor in the School of Public Policy at Simon Fraser University, says increasing annual limits will only benefit the wealthy and end up costing Ottawa billions of dollars more than has been anticipated.

He calls the proposal a “ticking time bomb.”

“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,” writes Mr. Kesselman in a report titled Double Trouble: The Case Against Expanding Tax-Free Savings Accounts, published Tuesday by the left-leaning Broadbent Institute.

His stand pits him against Mr. Poschmann, who remains at the right-leaning C.D. Howe Institute, where the two resided when they wrote their original paper. At the time, both argued in that paper that the tax-free accounts would be of chief benefit to low- and moderate-income workers.

Mr. Poschmann points out that two-thirds of TFSAs are held by tax filers reporting incomes of less than $60,000. “One of the reasons that we wanted TFSAs in the first place was to make it easier for more people of different types and different income levels to save and have flexibility of how they went about saving,” he said.

“The fact that some high-income earners are able to take advantage of the same program doesn’t mean it’s a bad program.”

On the issue of doubling contributions, he says that will only encourage Canadians to save even more. “Savings add up. Add $5,000 a year, give it a few years and a few decades and it makes a huge difference,” said Mr. Poschmann, who would stop at $11,000 annually for now.

Mr. Kesselman says even at existing contribution levels, within 40 years TFSAs could cost the federal government $15.5 billion annually in lost revenue and the provinces $9 billion, figures that would be “inflated” by doubling contributions limits.

TFSA contributions grew to $33.5 billion in 2012, surpassing RRSP deductions of $32.4 billion for that year. While the market value of TFSAs was $18 billion at the end of 2009, the year the investment product was introduced, money held in accounts had ballooned to $132 billion as of mid-2014.

The parliamentary budget officer said Tuesday TFSA contribution room will grow from $1-trillion in 2015 to $9 trillion by 2080 and estimates the fiscal impact to be $1.3 billion this year.

A statement from Joe Oliver, the finance minister, indicated his continued support for the TFSA but did not mention the issue of doubling contribution levels.

“Our government introduced tax free savings accounts as a way for Canadians to save for retirement, their kids’ education and the down-payment on a house,” Mr. Oliver. Today, nearly 11 million Canadians of all ages and income levels have a TFSA, with the vast majority of accounts belonging to low and middle-income earners. Only our government can be trusted to keep taxes low for Canadian families.”

“The Conservatives do pride themselves on doing everything that’s in their [2011] campaign platform. They sharply changed their package on income-splitting,” said Mr. Kesselman about a measure the Tories announced in October which provides a non-refundable credit of up to $2,000 for couples with children under 18.

This time he thinks the Tories can be convinced to make changes, in addition to not increasing the annual contribution limit, like setting a lifetime limit on holdings that would be tax-free and making sure withdrawals count against income-tested programs like old age security and guaranteed income supplement.

His counterpart Mr. Poschmann doesn’t agree with the idea of a lifetime limit. “Why don’t we impose limits on asset accumulation within RRSPs? We don’t, because the withdrawals are going to be taxed anyway. And withdrawals count as income toward eligibility for income-tested benefits like OAS/GIS, which have big clawbacks,” he said.

Current rules don’t call for the same clawback when it comes to TFSAs. “That is one of the reasons, the main reason, we wanted TFSAs – so that low-income people, and especially seniors, wouldn’t be made to look like financial fools for trying to save,” said Mr. Poschmann.

He might be convinced to accept Mr. Kesselman’s contention that TFSA money counts toward calculating eligibility for OAS and GIS.

“There is a longer-term policy question about rules for OAS/GIS eligibility: Are we comfortable paying such benefits to people who have significant assets? The structure of those benefit plans, and whether there are circumstances that might warrant assets for them, is a subject for legitimate long-term policy debate. It is not, however, a reason for denying people generous access to TFSAs now,” said Mr. Poschmann.