It’s now a foregone conclusion that Prime Minister Stephen Harper will increase the annual contribution limit of the Tax-Free Savings Account (TFSA) next spring when the Tories balance the budget, likely boosting it to $10,000. It’s a political move—engineered to bolster his re-election bid—and at first glance it’s great news for wealthy Canadians looking to tax shelter more of their investment earnings. But some tax experts are worried that it’s too good—that the government is giving up so much revenue, the tax break might not be sustainable over the long haul.
University of Calgary School of Public Policy director Jack Mintz says there’s no doubt that increasing TFSA contribution limits will allow Canadians to shelter more dividends, interest and capital appreciation from taxes. “It’s a positive step towards encouraging people to save,” he says.
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But Malcolm Hamilton, a senior fellow at the C. D. Howe Institute, says raising the TFSA limit is a short-sighted election tactic that will lead to real problems 10 to 15 years from now, when the entire baby-boom generation will be collecting Old Age Security. By allowing people to shelter more investment earnings from tax, future governments will have less money to pay for national programs—such as drug plans, OAS, GST rebates, and long-term care. “If you have a surplus one year, you do a one-year spend,” says Hamilton. “You don’t make a change that could have a 20-year detrimental impact.”
Mintz agrees that less tax dollars in the future could be a problem, but suggests the short-fall could be made up by increasing the GST or by introducing other types of expenditure taxes and levies. “The more people are able to accumulate their own money for retirement, the less dependent they’ll be on government programs,” he notes.
Hamilton believes a more sustainable way to encourage Canadians to save would be to increase RRSP contribution limits. According to a 2010 policy paper from the C. D. Howe Institute, anyone who earned $50,000 or more would benefit from this increase, while increases to TFSA limits will benefit a much smaller percentage of Canadian savers.