Debate Over TFSA Expansion: Expert Questions Need for Higher Limits
Malcolm Hamilton, a well-known Canadian retirement expert and actuary, argues that raising the contribution limits for Tax-Free Savings Accounts (TFSAs) is unnecessary. His objection is not primarily fiscal; instead, he worries that expanding the TFSA could weaken participation in Registered Retirement Savings Plans (RRSPs) and Registered Pension Plans, altering the balance of Canada’s retirement system.
Hamilton raised concerns in an email about the timing and tone of two recent reports critical of the TFSA. One report came from the Broadbent Institute and the other from the Parliamentary Budget Officer (PBO). Hamilton notes that the Broadbent Institute has clear political leanings and that criticism from that source is expected, but he finds the PBO analysis more consequential because it may indicate a shift in federal government thinking about the TFSA program.
The Broadbent Institute study, titled Double Trouble and authored by Jonathan Rhys Kesselman, projects that if the TFSA framework remains unchanged, the program could cost the federal government up to $15.5 billion annually in lost tax revenue after it fully matures, with provincial impacts totaling roughly $9 billion more. Kesselman’s early research helped shape the TFSA concept when it was first introduced in January 2009, even though his recent report highlights significant long-term fiscal implications.
Shortly after the Broadbent release, PBO Jean-Denis Fréchette issued a projection estimating the fiscal impact of the TFSA program for 2015 at about $1.3 billion, or 0.06% of GDP. According to the PBO, two-thirds of that cost, roughly $860 million, is federal and one-third, about $430 million, is borne by the provinces. The PBO further estimates that TFSA-related fiscal costs could increase tenfold by 2080, reaching roughly 0.57% of GDP.
Hamilton contests both reports’ presentation and interpretation of numbers. He argues that the PBO’s long-range figures lack sufficient context. For example, when the PBO projects an annual fiscal impact of $116 billion by 2080, Hamilton points out that Canada’s nominal GDP is also expected to be many times larger by that date, so headline dollar figures can be misleading unless presented relative to GDP and other fiscal trends.
Comparing the two studies, Hamilton notes a wide divergence in estimates. The PBO’s long-run estimate of 0.57% of GDP (which he interprets as about $12 billion in today’s GDP terms) contrasts with the Broadbent Institute’s estimate that the program could reduce revenues by more than $24 billion annually once fully matured. The Broadbent figure excludes certain transfer payment impacts; the PBO includes them—yet the Broadbent number still exceeds the PBO estimate by more than double.
Hamilton emphasizes that both analyses treat the TFSA in isolation rather than viewing it as a component within a complex and interdependent retirement and tax system. He argues that on a year-over-year basis, even a 0.57% change in GDP spread over several decades converts to a very small annual percentage—an amount he calls a rounding error in federal fiscal planning terms. By contrast, other elements of retirement policy, such as Old Age Security (OAS) and the Guaranteed Income Supplement (GIS), already drive larger swings in fiscal projections over time without provoking similar alarm.
Another point Hamilton makes is about distributional effects. He acknowledges that TFSAs are regressive in design: they tend to provide greater absolute benefits to higher-income Canadians who can make larger tax-free contributions. But he cautions that TFSAs operate within a system that includes highly progressive elements. OAS, GIS and the structure of the Income Tax Act channel more support toward lower-income seniors, and Hamilton believes the system as a whole remains progressive.
In Hamilton’s view, the proper debate is less about whether the TFSA alone is regressive and more about whether the combined retirement and tax framework should be made more progressive overall. He notes that TFSAs, RRSPs and employer pension plans all provide tax-advantaged savings that skew toward wealthier savers, but those same savers typically finance the programs and transfers that support lower-income Canadians in retirement.
Hamilton concludes that an expanded TFSA is not necessarily a fiscal threat and that headline projections should be presented with clearer context about GDP growth, shifting demographics and the broader retirement system. If critics want to argue for greater progressivity in retirement policy, Hamilton says, they should make that case directly and propose concrete changes to the whole system rather than singling out the TFSA for disproportionate scrutiny.
Jonathan Chevreau is editor-at-large for MoneySense and runs the Financial Independence Hub. His email is [email protected].
Related reading: Higher TFSA limits are not the enemy (Maclean’s)