Mathieu Frigon and Édison Roy-César
Economics, Resources and International Affairs Division
This is the second in a series of two articles that provide information and statistics regarding the Tax‑Free Savings Account (TFSA). The TFSA will celebrate its sixth anniversary in January 2015. It is the most significant personal savings vehicle established by the federal government since the Registered Retirement Savings Plan (RRSP), which was created in 1957.
(Également disponsible en français : Le Compte d’épargne libre d’impôt – 2. Impact sur les stratégies de finances personnelles des ménages et coût fiscal fédéral.)
Impact on Canadian household personal finance strategies
Unlike withdrawals from an RRSP, withdrawals from a TFSA are not taxable. The TFSA may therefore become the method of choice for individuals looking to accumulate savings in order to finance activities at various points in their lives (e.g., renovating a home, buying a car, starting a small business or taking a vacation).
While individuals cannot contribute to a family member’s TFSA, they can give money directly to a family member, who can then make a contribution. This strategy can minimize the tax paid on a family’s overall investment income. However, contributions to a person’s TFSA legally belong to that person, no matter the origin of the funds.
Table 1 shows a decline in the percentage of Canadian adults who reported interest and dividend income following the TFSA’s creation in 2009. This figure decreased from 37% in 2008 to 33% in 2009, before dropping further to 29% in 2011.
Table 1 – Percentage of Canadian Adults Reporting Taxable Interest and Dividend Income, 2006 to 2011
|Before the TFSA||After the TFSA|
Source: Table prepared by the authors using data obtained from Department of Finance Canada, Tax Expenditures and Evaluations 2012: Part 2 – Tax‑Free Savings Accounts: A Profile of Account Holders.
These statistics suggest that a fair number of Canadian adults transferred their interest- and dividend-bearing assets into their TFSAs, so that they no longer reported this type of income on their income tax returns. However, it is important to note that a number of other factors could have affected the percentage of adults reporting interest and dividend income, including the capital market volatility arising from the 2008–2009 financial crisis.
Change in federal fiscal cost from 2009 to 2013
The TFSA is a tax expenditure for the federal, provincial and territorial governments because it costs them tax revenue.
As shown in Figure 1, according to a Department of Finance Canada estimate, the TFSA’s annual fiscal cost to the federal government increased from $65 million in 2009 to $410 million in 2013.
Figure 1 – Change in the Federal Fiscal Cost of Tax-Free Savings Accounts, 2009 to 2013
Source: Figure prepared by the authors using data obtained from Department of Finance Canada, Tax Expenditures and Evaluations 2013.
This rapid increase in federal fiscal cost was predictable: as Canadians make new contributions and investment income accumulates in their TFSAs, the value of these tax-sheltered investments increases each year. For example, the total value of the financial assets held in TSFAs rose from $18.2 billion in 2009 to $65.9 billion in 2012.
In addition, the Department of Finance Canada has estimated that, “by 2030, in combination with other registered savings accounts [the RRSP and employer-sponsored registered pension plans (RPPs)], [the TFSA] will permit over 90% of Canadians to hold all their financial assets in tax-efficient savings vehicles.”
The TFSA’s fiscal cost – estimated at $410 million in 2013 – is certainly a considerable amount in absolute terms. However, it is equivalent to only 0.2% of the federal government’s total revenue, which was $264 billion in 2013–2014.
Furthermore, most of the investment income of the wealthiest Canadians, who own the majority of Canadian financial assets, will remain outside TFSAs because of the annual contribution limit and will therefore be taxable. For example, according to the Canada Revenue Agency, Canadians who earned $150,000 or more in the 2011 tax year (2.4% of taxpayers that year) reported 65.4% of all taxable capital gains, 51.9% of all taxable dividend income and 27.4% of all taxable interest income reported that tax year.