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TFSA limits to double; should we be happy?

The new Canadian five and 10 dollar bills, made of polymer, are displayed with the previously released 20, 50 and 100 dollar notes following an unveiling ceremony at the Bank of Canada in Ottawa April 30, 2013. REUTERS/Chris Wattie

With the Conservatives looking to double the Tax Free Savings Account (TFSA) contribution in the upcoming budget, Canadians will be able to sock away more money that can grow without incurring additional tax. So that’s great, right?

Well, there are costs, too.

Finance Minister Joe Oliver suggested in a memo to the Conservative caucus on Tuesday that the upcoming budget will include a doubling of the current annual TFSA limit from $5,500 to $11,000.

Sounds great if you’ve got the money to sock away. But keep in mind, there’s no free lunch. If someone’s benefiting, someone else is getting stung, and with any policy announced in an election year, sometimes it’s the same people on both ends of the stick.

A TFSA increase would be good for …

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So who will benefit? Well, investors will (duh). At least, investors who are already maxing out their current TFSA space and are looking to put in more. Remember, a TFSA lets you invests money that then grows without incurring either capital gains tax or income tax. Invest smartly, and you’ll be looking at a nice, fat, tax-free nest egg down the road.

And having Canadians saving more generally puts the country on stronger financial footing. When that U.S. style housing crash finally hits, more savings means more ability to absorb the pain.

Additionally, any program that encourages investment means more capital invested in companies, which boosts the market and helps pension funds. So yay!

But that lunch bill, remember?

And now, the cons …

The taxpayer foots the bill for this, to the tune of $1.3 billion in lost revenue for 2015, according a February report by Parliamentary Budget Officer Jean-Denis Frechette, who is the government’s in-house independent analyst (In other words, he’s not spouting any party line).

Maybe surprisingly, economists don’t consider that a lot of money, amounting to 0.06 percent of gross domestic product. However, the PBO sees that number going up sharply year-to-year, and doubling the contribution space should only accelerate that. This is all happening during a sort-of commodity crisis; so removing the government’s rainy-day cushion is seen by some to hold some risk in it. So is the timing right?

Carleton University Professor Ian Lee likens that to the question of whether it ever feels like a good time to move? It doesn’t, but sometimes it’s the right decision.

“If you believe it’s good for the long term health of the economy and Canadians and you think it’s a good thing to encourage more savings as the populations ages, (then) we’ve got to take steps now to encourage it,” he says.

And anyway, Canadians are getting the benefit, right? Yes, but that benefit is not necessarily spread evenly.

In the same report, PBO echoes a frequent criticism of the TFSA program: that its benefits are skewed to the wealthy.

“PBO estimates that the TFSA program is regressive overall,” it says.

And doubling the limit is going to benefit those who are already maxing out their contributions, which probably isn’t your average low-income earner.

The PBO (and remember, this is the government’s independent financial analyst, not some bank talking head trying to sell mutual funds) says while the benefits are currently spread fairly evenly across the income scale, that will shift up the income scale over time.

Lee dismisses the claim that it’s bad policy, saying the TSFA is less regressive than the more popular RRSP and is no more regressive than any other tax benefit.

“If we believe that the government should be encouraging Canadians to be taking greater responsibility for their own retirement. If one accepts that assumption, then TSFAs are a very good thing,” he says.

Of course, in an election year, this will be one of many political footballs. Happily for the Conservatives, their supporters tend to skew to the wealthy and elderly, many of whom will be lining up to pump up those TFSA contributions.