The Future of TFSAs

tax the rich

One of my arguments against the Ontario Retirement Pension Plan (ORPP) has been that for low-income workers, forcing them to save more in ‘registered savings’ is going to result in the claw back of “means based”  benefits like the Federal Government’s Guaranteed Income Supplement (GIS).  The net effect of these claw backs will be ‘effective tax rates’ well above 50%.  This isn’t a good deal for the working poor.  I will provide more details on the GIS in a future commentary but in the meantime the remainder of this commentary is focused on TFSAs and my speculation about their future.

TFSAs 101

TFSAs were introduced by Canada’s Federal government effective January 1, 2009.  The basic design of the plan is similar to an RRSP where a taxpayer can make contributions, up to a limit, to an account held with a registered provider (generally the same providers that offer RRSPs).  The limit on contributions in 2009 was $5,000 regardless of the income of a taxpayer.

The two key differences between TFSAs and RRSPs are:

  • There is no tax deduction for contributions made to the TFSA and the income derived from the TFSA is not considered taxable income; and
  • Withdrawals from a TFSA replenish the taxpayer’s accumulated contribution room (unlike RRSPs where you never get more contribution room once it is used the first time) so a withdrawal from a TFSA for an emergency need doesn’t remove the opportunity to replenish those savings at a later time.

One key similarity between these two vehicles is that while the taxpayer’s money is held in the account, the income earned on investments is not taxed.

Where did the TFSA come from?

TFSAs were originally proposed by Kesselman and Poschmann in their paper “A New Option for Retirement Savings: Tax-Prepaid Savings Plans” authored in February 2001 and published by the C.D. Howe Institute.  Go back and enjoy the paper if you have time.  For those that don’t have time or interest, at least enjoy these two quotes to get the gist of things:

“Canada’s tax treatment of retirement saving needs to be improved. For many low- and moderate-income workers, saving in Registered Retirement Savings Plans (RRSPs) makes little sense, as their tax rates and benefit clawbacks in retirement will be higher than those they face while working”

“TPSPs would more equitably apportion the fiscal burden of supporting future retirees between those who have saved while working and those who have not. TPSPs would also restore incentives for efficient saving by many workers at low and moderate earnings levels. Improved savings schemes would help Canadians better prepare themselves for retirement, while providing the funds to spur investment in jobs and economic growth.”

My response to the first quote is ‘amen’ and my response to the second quote is ‘I am all in’.

Contribution Limits

When introduced in 2009 the TFSA contribution limit was set at $5,000 per year.  In 2013 the limit rose to $5,500 per year (and stayed the same for 2014) and then in 2015 the Conservative Government dramatically increased the limit to $10,000 per year just as we headed towards a Federal election – coincidence? Probably not.

Who benefits?

It is often suggested that TFSAs benefit the rich.  Let’s take a few minutes to talk about who benefits from this program and why.  I can’t find proof, but I think we have more than 10 million TFSA holders in Canada – I am unafraid to be corrected but since the Conference Board just told us that there are 4.4 million account holders in Ontario the ten million number sounds reasonable to me.

If we had time and space, we really should try to break up taxpayers into annual income increments of $10,000 so we could consider how things are different for people earning $40k, $50k, $60k, or those earning $80k, $90k, $100k.  Happily for my readers, I don’t have the time or interest in being that scientific.

For discussion, let’s divide workers into three categories:  low income, those earning less than $50,000; middle income, those earning $50,000 to $99,999; high income, those earning $100,000+.  You should pause here and notice how you reacted to the ‘labels’.  Some think $50,000 is middle income – some think the same thing about $100,000.  They are just labels for purposes of discussion and they aren’t even placed at the most strategic break points given our income tax and social security systems.

Low Income – as noted earlier, low earners see their GIS clawed back in retirement as their other sources of income increases.  There is no reason why a $25,000 a year earner should be contributing to an RRSP.  A $1,000 contribution will get them a tax deduction of about $200 and when they pull the money out after they stop working (assume age 65) they will pay an effective tax of about $700 (I am ignoring investment income for simplicity).  Plain and simple this is not a good deal.  For these folks, putting $1,000 in a TFSA means that when they aren’t earning income – they can get their $1,000 back and it won’t affect their GIS.  This is one of the key groups the TFSA was intended to serve.

Middle Income – these are the folks that the RRSP was designed for.  Someone earning $75,000 a year can contribute $5,000 to an RRSP and at 2015 tax rates can save about $1,667 in taxes.  If that same individual pulls out their $5,000 in retirement when their total retirement income is down at $50,000 then the tax paid at that point is only $1,500.  The larger the gap between pre-retirement income and post-retirement income, the greater the tax advantage.

High Income – at some point, high-income earners start maxing out what they can contribute to an RRSP.  Anyone that doesn’t have some sort of pension plan and earning less than $138,500 in 2015 can contribute 18% of their earned income to an RRSP.  After that, contributions are capped at $24,930 and the percentage of income saved goes down as income rises.  So, someone making $249,300 can only save 10% of pay in an RRSP.  While some have advocated higher RRSP limits to help high-income earners save more effectively for retirement, others have noted that the TFSA becomes a supplementary vehicle to help solve the problem of insufficient RRSP room without providing a tax deduction during the year contributions are made.  In this way, TFSAs weren’t an attack on the government’s current tax revenue.

The future of TFSAs

Generally, high-income earners take excess earnings above what can be saved in an RRSP and spend it, use it to buy a bigger house, or save it in ‘after-tax’ investments.  Offering a TFSA where the ‘after-tax’ investments aren’t taxed on their income is a nice incentive to save after-tax dollars rather than spending the money; and the TFSA also likely has the ancillary effect of attracting dollars away from housing that is unnecessarily large and expensive.

I view the move to a $10,000 limit as purely a political move to motivate high-income earners to vote for the Conservatives.  Likewise, the reduction of the limit back to $5,500 is a political move of the Liberals to live up to a promise to voters they made to attract their votes – presumably the low-income earners that are unlikely to save more than $5,000 a year.

So where are we going next with this helpful tool for the low-income worker?  I keep wondering why the Ontario government is forging ahead with the ORPP for anyone earning over $3,500 annually.  I think the ORPP is a bad idea at any level, but surely if the problem that we are supposed to be solving is boosting the savings of the middle to high income earners we should have the ORPP start around the level of the YMPE where the CPP caps out – in 2016 that limit is $54,900.

Clearly the low-income workers are better off saving in a TFSA and this is the group most likely to decrease TFSA savings to cover the cost of contributing to the ORPP.  Even the province’s experts at the Conference Board agreed that

 “…lower income earners (those earning employment income below $40,000) would offset their RRSP savings by the after-tax cost of the increased ORPP contributions.”

The Conference Board is stranded focusing on RRSPs because they dismiss the relevance of TFSAs but they agree with my premise that these low-income workers are going to offset their savings elsewhere.  So why would Ontario punish these workers by forcing them to save in a regressively taxed registered pension plan instead of the optimal tax vehicle, the TFSA?

I have two guesses.  First, there is the possibility that the folks in Ontario’s government don’t understand the math and are making a mistake on behalf of the province’s least privileged workers.  Second, maybe Ontario’s government gets the math but already knows that by the time they implement the ORPP in 2017 the Federal Liberals will have cancelled the TFSA altogether.  That is going to be hard for the Feds to do now that TFSAs are in place – and arguably would be bad policy for low-income workers – but I am struggling to come up with a better explanation.

Joe Nunes
Joe Nunes
Joseph Nunes, Co-founder and Executive Chairman of Actuarial Solutions Inc., has practiced in the area of pensions and retiree health plans for over 30 years. He has experience with many types of plans including single-employer, multi-employer, private sector, government, unionized, non-unionized, as well as registered and non-registered executive plans.


  1. Avatar Shawn says:

    So I won’t go to far but you figure many people with a take home of $1800 a month(25K a year after taxes) have money to put into a TFSA?

    Kesselmen later wrote on why doubling the TFSA limit was bad public policy so he agrees with you that it was a political ploy. He also wrote in Macleans(March 2015) about how the TFSA tilts to favor higher income earners and while the gov of the time informed us that many low income Canadians were taking advantage of a TFSA many of those were just transfers of money from the higher income spouse to the one that was making little or no money to max out both sides of the TFSA allowed in a family unit. Further many were just transferring income tax payable assets to the non taxable TFSA. This is a very very popular tactic with seniors as well it only makes sense. Last but not least I will be contributing to this statistic now opening a TFSA for my daughter to hold university monies. She will be very low income LOL .. but hold a TFSA with big contributions.

  2. Avatar Bob says:

    If we were truly trying to help retirees and saving for such, we should have made or maybe create a Health care Spending Account as exists in the US.

    Maybe it could even replace the TFSA.

    The differences would be simple, money going into the HSA up to some limit would be tax deductible, any income earned in the HSA would not be taxable while in the HSA.

    Any dollars from the HSA spent on eligible health care expenses would not be taxed, any dollars taken from the HSA for non eligible Health care expenses would be subject to a income tax for those earning above the YMPE.

    The benefit would be that people could save both during their working life for unexpected health care expenses and could accumulate savings ofr expected expenses in retirement.

  3. Avatar Dan Murphy says:

    Good article on TFSA’s Joe.

    See the link below for data on TFSA distribution by account holders. Your 10 million was a pretty good number. Seems the distribution is about 56%/27%/17% using your yardsticks of less than 50k, 50 to 100k and greater than 100k for the income breakpoints, although the data would be skewed to the richer end if you consider that such population is smaller to begin with.


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