FEWO Committee Report

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Committee Report

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APPENDIX B
GBA of Tax-Free Savings Account
Introduced in Budget 2008

Budget 2008 announced the introduction of a Tax-Free Savings Account (TFSA) which will allow Canadians to contribute up to $5,000 per annum to a tax-free account. Any unused portion of the $5,000 annual limit can be carried forward to future years. Contributions made towards a TFSA will not be tax deductible and investment income (interest income, dividend income, capital gains and other investment income) earned in a TFSA will not be subject to income tax. Withdrawals from a TFSA will be tax-free and any withdrawals made through time will create contribution room for future savings. Moreover, contributions to a spouse’s or common-law partner’s TFSA will be possible and assets accumulated in a TFSA will be transferable to the TFSA of a spouse or common-law partner upon his or her death. Such measure is intended for Canadians to accumulate tax-free investment income and withdraw savings prior to retirement without affecting their taxable income. Finally, income earned in a TFSA as well as withdrawals from such account will not affect eligibility conditions for income-tested benefits and credits. Table 1 presents the estimated federal tax expenditures[1] induced by the implementation of a TFSA for fiscal years 2008-2009 and 2009-2010.

Table 1 — Estimated Federal Tax Expenditures Induced
by the Implementation of a Tax-Free Savings Account (TFSA),
in millions of dollars, 2008-2009 and 2009-2010

2008-2009	2009-2010	Total
5	50	55

Source: The Budget Plan 2008.

An individual’s ability to accumulate savings in a TFSA is conditional upon his or her after-tax income and consumption. At lower levels of after-tax income, a relatively high portion, if not the entire portion, of after-tax income is likely used for consumption. At such levels, the propensity to consume is said to be high and the propensity to save is said to be low.[2] At higher levels of after-tax income, however, the propensity to consume decreases and consequently, the propensity to save increases. Figure 1 presents the number of individuals for different levels of after-tax income and by sex for 2005. This graph is helpful in understanding the economic differences for women compared to men. As can be seen, at levels of after-tax income of $10,000 and over and for any subsequently higher level of after-tax income, women are outnumbered by men.

Figure 1
Number of Individuals by After-Tax Income and by Sex, 2005

Source: Statistics Canada.

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This graph, however, fails to distinguish after-tax income by marital status. The fact that a man has higher after-tax income compared to his spouse or common-law partner would be irrelevant in cases in which the full TFSA contribution amount is used (i.e. $10,000 per annum — $5,000 for each spouse) or, in cases in which the full contribution amount is not reached, that an equal contribution is made to each spouse’s TFSA.

Table 2 below presents the anticipated impact of this measure on men and women from the Finance Canada, as part of their GBA of new fiscal measures in the budget, Status of Women Canada, and Professor Kathleen Lahey who appeared on several occasions before this Committee.

TABLE 2 — GBA OF TAX FREE SAVINGS ACCOUNT (TSFA)[3]

Finance Canada

Status of Women Canada
(Excerpts from Submission)

Prof. Kathleen Lahey
(Excerpts from Submission)

Based on 2005 data, the tax relief on investment income provided by TFSAs will be shared roughly equally between men and women.

Not paying taxes on capital gains and investment income earned will likely be more advantageous for men given their higher earning power. The wage gap between women and men has stalled at 71% and persists across all levels of education and professional groups.

Typically investors tend to also be male, and share ownership is distributed more towards men who account for approximately 60% of dividend income declared for tax purposes. However, to the degree that women do have the disposable income to put savings into a TFSA, they will benefit equally to men.

This savings initiative has a potential impact on women who might not have the capacity to invest, but may avail themselves of this opportunity to invest smaller amounts.

Given that a higher proportion of women tend to be recipients of the Canada Child Tax Benefit and the Guaranteed Income Supplement Benefits and also that women live longer than men, and thus depend more on Old Age Security for a longer period of time, the fact that there is no claw-back based on income earned, or withdrawals from, the TFSA will be of benefit to women.

However, these benefits are only beneficial to women to the degree that they have enough disposable income to put savings into the TFSA to begin with. …

In recognition of the fact that couples often make their savings decisions and plan for their financial security on a joint basis, individuals may contribute to the TFSA of their spouse or common-law partner, subject to the spouse or partner’s available contribution room. This could benefit women based on the assumption of equitable intra-family spending patterns and equitable income sharing.

The TFSA will also provide seniors with a savings vehicle to meet any ongoing savings needs…. Based on current savings patterns, seniors are expected to receive one-half of the total benefits provided by the TFSA. Based on women’s longer life-span compared to that of men, this option will benefit women.

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. Typically a higher percentage of women tend to be in the lower tax brackets and so theoretically there should be some favourable impacts on women.

Some women may be able to make better use of TFSAs than they can of RRSPs. However, the overwhelming majority of women will not see any tax benefits from this new tax provision.

Men will be the main beneficiaries of these tax benefits, and the amount of investment income that is insulated from income taxation is expected to grow rapidly as the ‘lifetime exemption’ feature of TFSAs comes onstream.

Nearly 40% of all women in Canada have such low incomes that they pay no taxes in any event — so TFSAs will be just as irrelevant to them as RRSPs already are.

Even if some women do manage to save money in TFSAs, most women have much less ability to save any money as compared with men; thus the lion’s share of these new tax benefits will go to men.

TFSA income splitting doubles the individual saving limit (which is $5,000 per year) for couples, to $10,000 per year, for life.

TFSA income splitting does nothing for the poorest older Canadians, who are overwhelmingly older single women, or for women supporting others.

Like pension income splitting, the TFSA investment income being split with a second spouse/partner does not have to be legally owned by that person, and can still be legally owned by the first spouse/partner.

Lifetime income splitting with children is also possible, which circumvents the income and capital gains taxes that would otherwise be payable when a parent’s estate passes to them without TFSAs.

As time passes, the revenue cost of TFSAs will become very large, and will make it easier for governments to say that they cannot ‘afford’ more financial help for the poorest Canadians — including older women living alone.

[1] Tax expenditures are foregone tax revenues, due to special exemptions, deductions, rate reductions, rebates, credits and deferrals that reduce the amount of tax that would otherwise be payable.

[2] The propensity to consume is defined as the percentage of after-tax income that is used towards consumption. Likewise, the propensity to save is defined as the percentage of after-tax income that is used for savings. The propensity to consume and the propensity to save must add up to 100% at any given level of after-tax income in light of the fact that after-tax income can only be used in two different forms: consumption and savings.

[3] Information for this table is derived from the following documents submitted to the Standing Committee on the Status of Women: Finance Canada, “Gender Analysis of Budget 2008”; Status of Women Canada, “Federal Budget–March 2008”; Professor Kathleen Lahey, “Gender Analysis of ‘Tax Free Savings’ and Income Splitting with TFSAs”, April 8, 2008.

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