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Ten years of tax-free savings accounts have shown us these hugely popular savings vehicles have a weak spot.

No, it’s not that TFSAs should have a higher annual contribution limit. The real problem is that they’re not serving lower-income Canadians as well as they should. Too many low earners are using registered retirement savings plans to save for retirement when TFSAs would be vastly better. The next change to TFSAs should help them outshine RRSPs for low-income people who will receive the Guaranteed Income Supplement when they retire.

“When TFSAs were introduced [in the 2008 federal budget], the documents went on and on about how they were going to help low-income people,” said Richard Shillington, an Ottawa-based statistician who specializes in issues related to lower-income people. “They’re having some impact, but they haven’t corrected the situation. You still have the majority of assets of people who are GIS-bound in RRSPs, where they absolutely, no question, should not be.”

Mr. Shillington has written a report for the Montreal-based Institute For Research on Public Policy that assesses the impact of TFSAs on low-income people after 10 years. After their introduction in the 2008 budget, TFSAs were launched in January, 2009, with a contribution limit of $5,000 a year.

His conclusion is that low-income people too often put money into RRSPs for retirement and, as a result, put themselves at risk of losing some or all of their GIS benefits. The higher your retirement income from sources that include RRSP withdrawals, the larger the clawback of your GIS benefits.

Mr. Shillington figures that a low-income retiree might face what amounts to a tax rate of 50 per cent or more on RRSP withdrawals through a combination of income tax and clawbacks.

TFSA earnings and withdrawals have zero impact on your eligibility for GIS and other income-tested benefits, which is why Mr. Shillington regards them as the absolute better choice over RRSPs for people on a low income. Yet his research shows RRSPs continue to be a more popular destination than RRSPs for this group.

RRSPs do offer short-term gratification in the form of a tax deduction on contributions. But RRSP withdrawals in retirement are taxed and can cause clawbacks of government benefits. TFSAs contributions are made with after-tax dollars and there’s no tax to be paid on gains in the account or on withdrawals.

Mr. Shillington thinks TFSAs could be made more attractive to low-income people through a “saver’s credit,” which would work in a similar way to the grant money that the federal government offers people who contribute to registered educations savings plans. The Canada Education Savings Grant is paid on a 20-per-cent matching basis to a maximum of $500 annually a child on contributions of $2,500 (the lifetime maximum grant is $7,200).

The TFSA saver’s credit could be a 25-per-cent or 50-per-cent match for low-income contributors, Mr. Shillington suggested. “It’s a nudge and it would get the attention of people,” he said.

For some, the preferred change to TFSAs would be to restore the $10,000 annual contribution limit that was in place for 2015 only. The federal Conservatives raised the limit from $5,500 and the Liberals put it back to that level for 2016 after they won the last election (the limit increased to $6,000 this year).

But a higher TFSA limit would perpetuate the disparity in how well TFSAs work for higher and lower-income people. A 2015 study by the Parliamentary Budget Officer said an increase to $11,000 would benefit high-wealth households by about 10 times more than low-wealth households as measured by after-tax income.

A quick way to tell if you should be using TFSAs for retirement savings and avoiding RRSPs is to see if you’re in line to receive GIS benefits. Mr. Shillington said this applies if your income from sources other than Old Age Security (OAS has no impact on GIS benefits) is under $18,000 for a single person and $24,000 for a couple. He estimates that one-third of seniors receive GIS.

Mr. Shillington believes it makes sense for low-income people to default to TFSAs over RRSPs for retirement saving. “If you’re not sure, the cost of a mistake of being in a TFSA when you should have been in an RRSP is minuscule.”

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