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Everyone loves tax-free savings accounts – this is not in dispute.

But how good are TFSAs for the country? A study recently published in the Canadian Tax Journal raises some doubts.

“The key question that got us started in the first place is whether TFSAs really help Canadians to save more, as the government intended them to do,” said Lu Zhang, an assistant professor of finance at Ryerson University’s Ted Rogers School of Management and a co-author of the study. “What we found is that this isn’t quite the case.”

The issue with TFSAs is that they’re vacuuming up money that would otherwise have gone into registered retirement savings plans. The study calls this a “displacement effect.”

The study is based on a look at tax filers who made RRSP and/or TFSA contributions between 2009 and 2015. The numbers show that for every $1 someone added to a TFSA, 32 cents on average came from money that was displaced from RRSPs, and 68 cents was either fresh savings or money taken from non-registered accounts.

TFSAs do generate new savings, but Dr. Zhang said it’s not entirely clear how much. Can we at least say that TFSAs are obviously a big hit with savers, and how can that be a bad thing? Not really, she said. “If people are using TFSAs to replace RRSPs, that could mean Canadians are saving even less than before for their retirement.”

While most people understand that the purpose of RRSPs is retirement saving, TFSAs can be for anything. At the age of 25, a TFSA could be a young adult’s ambitious attempt to start saving for retirement; at 30, this money might be re-tasked for a home down payment; at 40, it’s now a fund for home renovations.

TFSAs are also a lot less sticky then RRSPs. A TFSA withdrawal can be done instantly online, and the money is tax-free. RRSP withdrawals require forms to be filled out, and stiff withholding taxes apply on the cash you take out.

The bizarre reality of TFSAs just might be that they have successfully enticed Canadians to save more, even as the amount of money being saved specifically for retirement stagnates or possible even declines.

The TFSA was introduced in 2009 with an annual contribution limit of $5,000. The ceiling is $6,000 for 2019, and there was a $10,000 limit for 2015 alone. Yet another reason to question how well TFSAs have worked to boost savings: Almost no one is maxing out their contributions.

In fact, the study shows that just 2 per cent of contributors made the maximum TFSA contribution in 2015, down from 10 per cent in 2009. With RRSPs, a steady 2 per cent to 3 per cent of contributors added the maximum between 2009 and 2015.

The study says young adults are the demographic group most likely to put money into TFSAs instead of RRSPs, which makes good sense. The flexibility of TFSAs works well at this stage of life, and there’s a tax advantage as well. A millennial with an entry-level salary gets a modest tax break for making an RRSP contribution and would very likely pay more in tax when withdrawing money from the RRSP in retirement. TFSA withdrawals are, obviously, tax-free.

As noted in the study, the federal government introduced TFSAs to “complement existing registered savings plans.” The fact that this goal has been just partly successful is a testament to how user-friendly TFSAs are. People just like them better than RRSPs.

People choosing TFSAs over RRSPs may have an impact on the level of future retirement saving. But for now it looks like the biggest loser as a result of the popularity of TFSAs is the federal government.

Money held in RRSPs is tax-sheltered, but tax must be paid on withdrawals. If TFSAs displace RRSPs for saving, then there’s a growing pool of money the government will never be able to tax on withdrawal. Cheer if you want to, but that’s money to pay for things like health care in a country where almost one in four people will be a senior in a dozen years.

This is an issue that the federal government will have to deal with at some point. As for savers, it’s never a bad mistake to contribute to a TFSA. Just make sure you’re saving for retirement as well as a renovated kitchen.

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