Raise a glass to raising the TFSA ceiling
The media often observe that Canadians don’t save enough. A recent BMO study agrees, noting that a third of Canadians surveyed have less than $10,000 in savings. The Canadian household debt to disposable income ratio rose to a new high of 163.3% in the last quarter of 2014, with a household savings rate of just 3.6%, compared to more than 20% in the early 1980s.
What can be done about this lamentable state of affairs? Well, Tax-Free Savings Accounts (TFSAs), by keeping the gains on investment income out of the government’s hands, encourage people to save more. The recent raising of the annual limit of how much a taxpayer can contribute to a TFSA from $5,500 to an even $10,000 is therefore excellent news for all Canadians.
Some detractors claim that raising the contribution limit only benefits the rich, since they’re the only ones who can invest large amounts. The numbers, however, tell a different story: Over 80% of those who contribute to a TFSA have incomes below $80,000. What’s more, one in five workers who earn less than $20,000 a year contributes to a TFSA.
But even if it turned out that the previous ceiling level was sufficient for the majority of Canadians, this would not be a valid reason to oppose the ceiling hike. First of all, we need to remember that the money deposited in TFSAs comes from sums that have already been heavily taxed. The top federal individual income tax rate alone is 29%.
Those who say that only the “rich” will benefit from these tax gains also forget to mention that these same “rich” pay a disproportionate share of Canadian income taxes. In 2009 for example, the 5% of Canadians who earned more than $100,000 a year paid almost half of all income taxes collected by the federal government.
And too many commentators write as though “the rich” were the same people year after year, when in reality, there is great social mobility in Canada. According to a recent longitudinal study by the Fraser Institute, 87% of people in the bottom 20% in 1990 had moved up at least one income group by 2009, with 21% ending up in the top 20% of earners. Meanwhile, 36% of individuals in the top 20% in 1990 had moved down at least one income group 20 years later.
Another, different argument levied against the raising of the TFSA ceiling is that it will end up destroying the country’s public finances. The reality, according to the department of finance in the recently tabled federal budget, is that this increase, which is not indexed to inflation, will represent just 0.3% of the federal government’s total tax revenues in 20 years. This is a relatively tiny amount for Ottawa, but will make a sizable difference to Canadian savers.
With the raising of the TFSA contribution limit, investors can accumulate several thousands of dollars of investments tax-free, year after year. The limit increase is therefore excellent news for all Canadians, both small investors who are primarily interested in providing for their golden years, and also those with more money to play with.
Provincial governments in particular have been increasing Canadians’ tax burdens substantially in recent years. Quebec’s tax take, for example, rose to 24.5% from 21.9% of GDP between 2003 and 2013. Quebecers’ average disposable income actually fell in real terms in 2013, the first time this has happened in 17 years.
In such a context, moving toward the de facto elimination of the capital gains tax on financial investments for the great majority of Canadians is both worthwhile and welcome.
Michel Kelly-Gagnon est président et directeur général de l'Institut économique de Montréal. Il signe ce texte à titre personnel.