Benefits of new tax-free savings accounts
OTTAWA - Depending on who you ask, the new tax-free personal savings plan announced in the federal budget this week is either revolutionary, smoke and mirrors, or "better than nothing."
The range of reaction illustrates the complexity of forecasting just how many Canadians - and which ones - will benefit from the proposed tax shelter.
The measure, due to kick in next year, allows Canadians to create special savings accounts where they can park up to $5,000 a year in after-tax income.
The money can then grow indefinitely without any further taxation, be withdrawn for any purpose at any time, and be used without affecting a person's eligibility for any federal income-tested benefits.
Finance Minister Jim Flaherty describes the savings plan as akin to the ubiquitous RRSP in terms of historical significance.
The move will cost the federal treasury just $5 million in foregone tax revenue this year and $50 million next year. For individual savers, that amounts to just a few bucks in tax savings.
That prompted Derek Holt, an economist with RBC Financial Group, to say the measure is "more about optics than it is about substance." He suggests it won't change saving behaviour.
But the budget predicts foregone revenue will top $3 billion - in today's dollars - within 20 years.
So who exactly will reap that compounded tax savings?
John Williamson of the Canadian Taxpayers Federation suggests it could be nearly everyone.
"I think you're going to find people up and down the income ladder who take advantage of it," he said.
For modest-income Canadians drowning in debt, the opportunity to set aside up to $5,000 annually may ring hollow. But advocates for the working poor say the plan does open a rare window for those Canadians with the discipline and foresight to use it.
Finance officials maintain that is exactly who will win.
"In the first five years, it is estimated that over three-quarters of the benefits of saving in a TFSA will go to individuals in the two lowest tax brackets," said the budget document.
The document does not speculate about the longer term beneficiaries.
Several analysts argue that with a maximum contribution of $5,000 a year, it's not a vehicle for the truly wealthy.
"Careful," counters Richard Shillington, a left-leaning economist who notes the contribution limit is both indexed and cumulative.
Every year, a person's unused savings room will grow by another $5,000-plus.
"In the short run, this is not a huge windfall for the rich," said Shillington. "But in 40 years, it's $200,000 - and only the rich will have the lump sum money to say, sure, I'll stick $200,000 in."
Nonetheless, Shillington says the savings program is "better than the status quo."
His personal crusade is to inform modest income Canadians about the dangers of RRSPs, which claw back government retirement benefits at rates that can exceed 50 cents on the dollar.
"If you use an RRSP and it's bad for you, you could lose half your money," said Shillington. "If you're not sure, use this (savings plan)."
That's also the analysis of Andrew Sharpe of the Centre for the Study of Living Standards.
"If you're not saving, obviously it's (worth) nothing," he said of Canadian household debt problems.
But for modest savers, he said, the program is an improvement on RRSPs. And it's a far more progressive tax measure than proposals for an exemption on capital gains income, which Sharpe said would be "extremely concentrated among top income people."
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