Distributional Impacts of Canada's Tax-Free Savings Accounts

Abstract

Since 2009, Canadians have had the opportunity to contribute to tax-free savings accounts (TFSAs). This study provides insight into the attributes of TFSA participants. I use data from the Canada Revenue Agency (CRA) for general participation trends and the 2012 Survey of Financial Security (SFS) to examine the socio-economic characteristics of participants and their contributions. Examining data from the CRA, I find that the majority of tax-filing Canadians did not participate in the TFSA program by 2013, with age and income level affecting participation and contribution decisions. Evidence from the SFS data corroborates that obtained from the CRA data. I find that households with children or households headed by individuals with less than postsecondary education are less likely to participate. In addition, I find that households with higher net worth are more likely to participate and contribute more. Consequently, I conclude that TFSAs are likely to have an economically significant distributional impact, making them less attractive on distributional grounds.

It’s Not Just a Pay Gap: Quantifying the Gender Wage and Pension Gap at a Post-Secondary Institution in Canada

“…As such, women's longevity relative to men's introduces another potential source of inequity, as their private savings must be made to stretch over a longer life span. Zaman (2017), in examining TFSA participation trends, found no bias in terms of gender, although the majority of tax-filing Canadians (close to 66%) were not contributing to this program in 2013, and those who did tended to be from households with higher net worth (higher after-tax income was not statistically significant, although age and education were). Families with dependent children participated and contributed less to this savings plan.…”

“…Families with dependent children participated and contributed less to this savings plan. Given that TFSAs are "less attractive on distributional grounds" (p. 331), the plan is, according to Zaman (2017), associated with a take-up "challenge similar to that of the RRSP" (p. 347). Private savings plans privilege those (usually men; Denton & Boos, 2007) with the ability to accumulate savings over the duration of their working life (Curtis & McMullin, 2019), which may not always be the case for those entering the workforce later in life (i.e., those taking a significant number of years to obtain the education necessary for an academic career) (Lin, 2008), or those who are saddled with the significant financial burdens of raising children (Agopsowicz, 2019).…”

Tax-Preferred Savings Vehicles: Can Financial Education Improve Asset Location Decisions?

“…This may explain why Canadians who use TEE vehicles (TFSAs) are more financially sophisticated (Lavecchia, 2018) and more educated (Al Zaman, 2017) than those using EET accounts. Messacar (2017) and Al Zaman (2017) report that low-income taxpayers are more likely to use EET (RRSP) 7 A number of studies have looked at how the availability of back-loaded retirement vehicles has affected savings (Venti and Wise, 1990, Gale and Scholz, 1994, Chetty et al, 2014.…”

Family‐level responses to the introduction of Tax‐Free Savings Accounts

“…In particular, those that own only a TFSA tend to be young adults and have an annual pre-tax income in the bottom two quartiles. Families that own both accounts tend to be older and have higher levels of education and income (Department of Finance Canada 2013, Shaw 2015, Al Zaman 2017, Messacar 2017, Marchand 2018, Lavecchia 2018b. Kesselman (2015b) argues that high take-up rates and large contributions by seniors with modest incomes is evidence that wealthy older Canadians use the TFSA to shift taxable assets away from high income earners to avoid taxes on capital income.…”