A major criticism of TFSAs is their benefits are not distributed equally: mid- to low-income Canadians can’t afford to contribute.

In the federal budget speech of February 26, 2008, Finance Minister James Flaherty introduced a new savings plan, the Tax Free Savings Account (TFSA), stating, “Mr. Speaker: The budget is balanced. Taxes have been cut. And Canadians will now have a powerful new incentive to save money, tax-free: the Tax-Free Savings Account that we are announcing today.”

Those who are 18 years or older and have valid Canadian social insurance numbers are eligible to contribute after-tax dollars into these accounts throughout their lives. This unique savings vehicle should enable Canadians to save without being concerned about their eligibility for federal income-tested benefits and credits. Yet, since the plan’s inception, there has been much debate over the merits of TFSAs.

One of the most important arguments against the TFSA program is that it is less equitable than claimed. Many Canadians cannot afford to contribute to the program, so they get no direct benefit. But they could indirectly experience a negative effect, because TFSAs reduce the government’s tax revenues. A decline in revenues could mean cuts to services, and such reductions are more likely to affect those in the mid- to low-income level. Thus the program’s benefits are far from equally distributed.

In this article I review briefly the distributional impact of the TFSA program. Data from the Canada Revenue Agency and the 2012 Survey of Financial Security (SFS) give an idea of the impact and take-up of TFSAs.

The participation rate among those eligible in 2013 was 39.49 percent overall in Canada (figure 1). The top three provinces by take-up are British Columbia (43.76 percent), Ontario (42.90 percent) and Alberta (41.85 percent) (figure 1). As figure 1(a) shows, there are considerable differences in participation rates among provinces.

Unlike the Canada Revenue Agency data, the 2012 Survey of Financial Security provides a rich perspective on the socio-economic profiles of TFSA participants and their contributions (figure 3). Significant differences are evident between participants and nonparticipants. On average, participating households have higher net worth; their total assets are almost twice those of nonparticipating households. These households are significantly more likely to have an RRSP/LIRA balance and be covered by some form of employer pension plan. In addition, the proportion of those who own their principal residence is higher among TFSA participants. Overall, close to 66 percent of households either do not participate in the program at all or maintain a balance of zero dollars in their accounts. Moreover, 80 percent of the money in TFSAs is held by only 20 percent of TFSA participants.

Demographically, the profiles of the major income earners in TFSA-participating households or family units (defined as groups of two or more persons living in the same dwelling and related to each other by blood, marriage, common law or adoption) also differ from those of nonparticipants. Participants are on average older, are less likely to have children under the age of 18 and are more likely to be couples. Education emerges as an important attribute. On average, households whose heads have post-secondary education are more likely to contribute to TFSAs. This is not surprising, as higher educational attainment is usually related to higher incomes. In gender, there is no particular bias.

Having children affects TFSA participation rates. Participation is the highest among couples with no children (42.51 percent) and lowest among single parents (14.52 percent). Here there is a gender bias: female single parents are the least likely to participate and contribute. But among single parents, those with post-secondary education are three times more likely to have a TFSA. Relative to single parents, couples with children are more likely to participate (30.21 percent).

Overall, the current findings show that Canadian families with higher net worth, age and education participate more in TFSAs and contribute more, and families with dependent children participate and contribute less. These numbers clearly show that asymmetry exists not only in participation but also in contribution.

The inequity patterns in TFSA participation and contribution are strong and merit serious consideration. Although the recent reduction in contribution limit may reduce further growth in inequities, a challenging question remains for policy-makers: How can the TFSA program be reformed to incentivize and engage all Canadians, in order to reduce its inequities? If this question is not addressed, the take-up of TFSAs by average Canadians may continue to decrease.

This article was based on my study published in 2017 in Canadian Public Policy.

Illustration: Shutterstock, by kang hyejin.

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