How a TFSA top-up could be a shot in the arm for ailing Canadian investment

Over the past decade, Canada has been struggling with an unprecedented investment retention crisis. Between 2015 and 2024, over $1 trillion of investment left Canada in what an RBC report describes as “the largest capital exodus in Canadian history.” To mitigate this mass exodus, one policy solution that should be considered is adding $5,000 of additional annual Tax-Free Savings Account (TFSA) room, reserved for investments in Canadian companies.

The TFSA, first introduced in 2008 under the Harper government, was touted by the Finance Department at the time as “the single most important personal savings vehicle since the introduction of the Registered Retirement Savings Plan (RRSP).” Since coming into effect in 2009, the program has indeed grown to become a widely utilized wealth-building tool for the middle class, and even for a sizable segment of the lower middle class.

As a quick reminder, Canadian adults who contribute after-tax dollars into a registered tax-free savings account pay no tax on the growth of that money. The eligible amount that can be deposited per year is currently $7,000, up from $5,000 in 2009. Any unused contribution room is simply rolled over and accumulated, and any withdrawn amounts replenish TFSA contribution room the following January. No tax obligations in or out, and no penalty for withdrawing to fix a roof, buy a vehicle, or cover a layoff.

Seventeen years on, this program is arguably a home run. A 2022 survey found that 58 percent of Canadian adults hold a TFSA, against 46 percent with a retirement plan. And so it seems that Canadians, overall, see even more utility in TFSAs than in RRSPs.

Of all TFSA contributions made in 2024 by Canadians with reported incomes, Canadians earning less than $50,000 accounted for about 34 percent of the total ($40.1 billion) and those earning between $50,000 and $99,999 for another 35 percent ($41.8 billion), as shown in the figure below. Average contributions do rise with income, but not as much as a critic of the program might imagine.

These numbers clearly indicate that the TFSA is not exclusively for the wealthy. Indeed, just about three-quarters (74 percent) of all holders sit below the six-figure line of annual income. The TFSA is therefore, by any reasonable measure, the most successful piece of middle-class savings policy this country has produced in a generation.

A TFSA top-up for Canadian investment

This successful program could be leveraged to provide even more value to Canadians. In the most recent federal election, Conservative leader Pierre Poilievre proposed a $5,000 top-up to the TFSA, under the condition that the $5,000 be invested at home, in Canadian companies only. This proposed increase of the yearly TFSA contribution limit could help alleviate the weak capital formation Canada has seen since 2015.

The weakness in investment in Canada has led to stagnant productivity and, when compared to the United States, a widening investment-per-worker gap. This threatens to degrade Canadians’ working standards, living standards, quality of life, and income growth. On top of the direct ramifications of lost investment, lower worker productivity creates an unfavourable environment for investment, thus generating a vicious cycle that drives away even more capital.

While only about 9 percent of TFSA holders max out their contribution room, that share climbs from under 7 percent among those earning below $50,000 to nearly 28 percent for those earning above $250,000. Additional room of the kind described above, then, is a tool for domestic capital formation. It asks nothing of Canadians who cannot save more, while giving those with capital to invest an incentive to deploy it in Canada instead of sending it abroad.

Here, then, is another good Conservative idea the Carney government should feel free to steal. To be sure, it won’t solve our investment problems all by itself, but it is entirely consistent with the prime minister’s plan to build Canada strong.

And given the mass capital flight of the past decade, not to mention the recently heightened trade tensions with our largest trading partner, the Canadian economy needs all the good ideas it can get.

Michel Kelly-Gagnon is Founding President of the MEI and Sam Bonnett is a research intern at the MEI. The views reflected in this opinion piece are their own.