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Tax-free savings accounts: who uses them and how?

TitleTax-free savings accounts: who uses them and how?
Year of Publication2015
AuthorsLavecchia, A. M., and Smart M.

The Tax-Free Savings Account (TFSA), introduced in Canada in 2009, has been extremely popular. In 2013, Canadians held $118 billion in TFSA assets and annual contributions exceeded $40 billion. Recently, the annual contribution limit was increased from $5,000 to $10,000 per year, leading to a policy debate about the merits of the program. Arguments in favor of increasing the annual contribution limit appeal to the program's popularity among middle-income families and claim that the account encourages new saving. The main argument against expansion of the TFSA is that the account disproportionately benefits wealthy families. Due to limited data availability on TFSAs, however, this debate has proceeded with very little evidence on the basic facts about average TFSA contribution behavior. This paper aims to fill the gap by presenting new evidence on TFSA owners using microdata from Survey of Financial Security (SFS). We explore the extent to which the TFSA is meeting two of its initial stated objectives: to encourage saving among those that are not well served by traditional tax-deferred accounts, as well as to allow those constrained by annual limits to do more tax-recognized saving. We find some support for both hypotheses. For example, 28 percent of families that do hold taxable assets but do not own a RRSP are TFSA owners. In contrast, 58 percent of families that hold both RRSP and taxable assets own a TFSA. We discuss the relevance of these facts for the current policy debate and in the context of potential policy reforms.

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