Tories’ ‘regressive’ TFSA plan would cost Ottawa billions, watchdog says

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Parliamentary Budget Officer Jean-Denis Fréchette says the Conservative government's plan to double the contribution limit for tax-free savings accounts would cost Ottawa and the provinces billions in revenue.

In a new report released on Tuesday, the PBO notes that if the current annual limit of $5,500 is increased to $11,000, Ottawa would lose $14.7-billion a year in federal revenue by 2060 and the provinces would lose $7.6-billion a year.

The PBO also notes that doubling the contribution rate would primarily benefit well-off Canadians, making the tax break "much more regressive."

"By 2060, gains for high-wealth households project to be twice the median and 10 times that of low-wealth households," the report states.

The PBO report comes on the same day as a similar report from Simon Fraser University professor Rhys Kesselman, who also noted that while the program's cost in terms of lost revenue is relatively small for now, it will grow significantly.

A TFSA allows Canadians to earn interest and investment income tax free, and to withdraw money without a penalty. Unlike a registered retirement savings plan – which defers tax on contributions until they are withdrawn – contributions to a TFSA have already been taxed.

Doubling the annual TFSA contribution limit and launching an adult fitness tax credit are the last two tax cuts promised in the 2011 Conservative election platform that have not been implemented.

The TFSA was launched in 2009, and the contribution limit was $5,000 when the promise to double it was made. It is not clear what the new limit would be or even if the Conservatives will act on the promise.

The opposition NDP and Liberals challenged the government to respond to the PBO report on Tuesday in the House of Commons, but Finance Minister Joe Oliver did not attend Question Period. Kevin Sorenson, the minister of state for finance, did not indicate whether the government plans to keep the promise to double the contribution limit.

"We are proud to put more money back into the pockets of Canadian families instead of into the government coffers, as the Liberals and the NDP would do," Mr. Sorenson said.

The PBO and Kesselman reports say that, because any unused portion of the contribution limit can be carried forward, it is primarily high-income earners who can afford to deposit the existing maximum each year. They say it would largely be the most well-off who could benefit from a new maximum annual contribution of $11,000.

Another key policy consideration raised in both reports is the impact on federal and provincial programs that are income-tested, such as Old Age Security, the Guaranteed Income Supplement and provincial programs like disability or drug benefits.

Income from a TFSA is not counted as income for the purposes of qualifying, meaning more people will be eligible for the programs – or for more generous benefits – than would have otherwise.

Provincial revenue would also be affected because many provinces have harmonized their definition of taxable income with Ottawa's.

Dr. Kesselman's report says this would impose a significant change on provincial finances without their input.

"The creation of TFSAs and their prospective doubling exert drains on provincial revenues that the individual provinces have not consciously chosen," the paper states. "They also reduce the progressivity of provincial income taxes in ways that the provinces have not chosen."

The PBO report notes that because the TFSA is listed as a "tax expenditure," rather than direct program spending or a transfer program, it will not receive regular parliamentary scrutiny.

"Thus, the TFSA program projects to undergo tenfold growth under existing program rules without planned parliamentary review or approval over tax expenditure amounts or an assessment of progress toward the program's policy objectives," the report states.