Economic analysis

Stop pretending the TFSA expansion won’t be felt until 2080

The TFSA expansion means that by 2025 almost no one under 40 will pay tax on investment income. We should at least debate whether that’s bad or good.

Minister of Finance Joe Oliver delivers the federal budget in the House of Common on Parliament Hill in Ottawa on Tuesday, April 21, 2015. (Adrian Wyld/CP)

Minister of Finance Joe Oliver delivers the federal budget in the House of Common on Parliament Hill in Ottawa on Tuesday, April 21, 2015. (Adrian Wyld/CP)

The expansion of Tax-Free Savings Account room in the federal budget has generated a lot of attention—including a quip from Finance Minister Joe Oliver that tax policy problems won’t arise until 2080 and should not be the concern of today’s taxpayers.

Myself, I will be a spry 108 years old in 2080, but beyond my age I don’t know much else about the challenges the world will face in that distant year. I have a better grasp of what the world will look like in 2025, so let’s just ask a simpler question: How will the TFSA landscape affect taxation over the next 10 years? If 2080 is outside the planning range for our government, I hope it is at least admissible to consider what will happen between now and 2025.

The most important feature of TFSAs is that room accumulates through time, starting at age 18. The annual limit started at $5,000 in 2009, moved to $5,500 in 2013, and the budget has now moved the limit to $10,000 from 2015 forward. This means that 10 years from now in 2025, every Canadian who is age 34 or older will have full possible contribution room of $141,000. For a couple, that would be $282,000.

How many Canadians in their 30s have $282,000 of assets that are currently subject to tax? I don’t have easy access to the most recent data, but as of the 2005 Survey of Financial Security, fewer than one per cent of families aged 30-40 have more taxable assets than they could fit in a TFSA, given those limits. (A complete analysis along those lines was published in 2012.) So, what this suggests to me is that very few people in the future will have any need to pay much tax on investment income—TFSAs will provide almost total coverage of assets.

    This means that within 10 years, our tax system will become one in which almost no one under 40 pays any tax on investment income. This is, to my mind, the main issue that the TFSA change brings forward. It’s not whether some people might be constrained by the current $5,500 limit. Of course there are some heavy savers (especially many of today’s seniors who have a lifetime of assets saved up) who could contribute more right now. But, in my view, we need to view the TFSA increase not as a one-year policy change, but as something that accumulates through time. From that vantage point, the consequences for the tax system are fairly radical.

    Careful readers will note I didn’t say whether exempting most investment income from taxation would be bad or good. Some economists are very keen on moving toward a system that taxes consumption instead of all income. By removing the bias against saving, more efficiency and economic growth may result, and exempting investment income is viewed as a path to get to that goal. On the other hand, other economists are worried about who benefits from such a reform, since most investment income is currently taxed in the hands of high earners.

    I think that is a great debate to have—but the debate must begin by acknowledging the facts about the expansion of TFSA limits. In my view, the facts suggest that a $10,000 per year TFSA limit will move us quite far along the path of eliminating the taxation of investment income within 10 years. We should have a great debate about whether exempting investment income from taxation is bad or good for the economy, but we should not pretend that nothing will change until 2080.

    (My disclosure statement is here.)

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