Canada’s Opposition parties are ganging up on the governing Conservatives on tax-free savings accounts (TFSAs) — specifically, the increase to the annual contribution limit introduced earlier this year.
The Tories almost doubled the maximum annual contribution limit in this past spring’s federal budget, to $10,000 from $5,500, but the Liberals, New Democratic Party (NDP) and the Green Party all say they would bring it back to its previous level.
The three parties claim the new contribution limit will have very little impact on most Canadians and only caters to the wealthy.
“Our primary focus is on policies to help the middle class,” says John McCallum, Liberal candidate for the new riding of Markham — Thornhill and current member of Parliament for Markham — Unionville. “Not many middle class people have a free $10,000 to invest every year.”
McCallum, who was the chief economist with Royal Bank of Canada before entering politics in 2000, says the Liberals would implement infrastructure programs for jobs instead.
“You can’t do everything. You have to make choices,” he says.
The NDP has crunched the numbers and pegged the cost of the increased TFSA contribution limit to $160 million for fiscal 2016-17 and to $360 million by fiscal 2019-20.
“We know that middle-class families are struggling to make ends meet and they’ve got mounting household debt,” says Erin Selby, a former cabinet minister in Greg Selinger’s NDP government in Manitoba and a federal candidate in the Winnipeg riding of St. Boniface. “Saving this kind of money is a pipedream for most of them.”
Selby, a mother of three teenage girls, says it’s simply not practical for her to put aside $10,000 a year into a TFSA: “From what we can see, [the contribution limit increase] will have little benefit for the vast majority of Canadians, only the wealthy few. We are interested in finding ways to make lives easier for middle-class families. They want to increase their savings, but they want to pay their bills.”
Similarly, Deborah Coyne, senior policy advisor to Green Party Leader Elizabeth May and a Green Party candidate in the riding of Carleton, just outside of Ottawa, also believes the increase will benefit too few people.
“We would put [the contribution limit] back to $5,500 and index it [to inflation],” she says, noting that at this amount, more than 90% of Canadians would be able to shelter their annual savings.
According to a Green Party policy document, the decision to raise the limit means TFSAs become a vehicle for “wealthier Canadians to shelter than income [rather] than a means to help people to save for retirement or other contingencies.”
The Green Party claims the increased limit will erode the federal government’s revenue base by “billions” of dollars.
A new report from the Broadbent Institute, an Ottawa-based left-leaning research house, appears to back up the Opposition claims, saying there has been a steep drop in the number of Canadians who maxed out their TFSA contributions in the past couple of years.
First, it found 62% of people eligible to open a TFSA had yet to do so by the end of 2013. Of those who had opened one, only 17% had contributed the maximum amount. And only 5% of Canadians eligible for TFSAs with annual incomes less than $60,000 hit the ceiling.
On the flip side, 31% of Canadians earning more than $250,000 per year maxed out their TFSAs.
Although the Liberals want to help Canadians increase their savings, they would enter into discussions with the provinces regarding a “moderate” expansion of the Canada Pension Plan (CPP) instead, McCallum says.
“I’m in all in favour of savings vehicles such as the TFSA, but we see a huge amount of unused room [in TFSAs and RRSPs],” he says. “Canadians aren’t saving enough. That’s why we think we would like to expand the CPP.”
Although various attempts to contact the Conservatives were unfruitful, McCallum’s namesake, John McCallum, a finance professor with the I.H. Asper School of Business at the University of Manitoba, says the TFSA is a much-needed investment vehicle considering that savings rate in Canada today is less than 4%, which is low compared with the traditional level of about 10%.
“One of the big problems we’ve had in Canada is because interest rates are so low, people don’t save,” he says. “[Higher] TFSA limits will benefit people and shelter income from taxes. In some sense, the change in the TFSA will offset the lower [interest] rates.”
To help the Canadian economy, McCallum says you don’t need every single resident to contribute the maximum TFSA limit, as 20% would probably do it, he says.
“In 25 years, many Canadians who take advantage of it will be really glad that they did,” he says.
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