Finance Committee on April 28th, 2015

[Mostafa Askari]

That's right. The cost will obviously increase as the contribution room increases over time. But also, one has to put the cost increases in the context of the size of the economy. In the long run, our estimate is that by 2080—which is obviously a very long period of time—the cost of the TFSA overall, the total cost for the federal and provincial governments, would be about 0.7% of GDP.

[Nathan Cullen, NDP, Skeena—Bulkley Valley, BC]

So 0.7% of GDP is a lot for one tax initiative.

[Mostafa Askari]

Well, again, it depends on how you compare it with other programs. That is very close to what the cost of the RRSP is right now.

[Nathan Cullen, NDP, Skeena—Bulkley Valley, BC]

We're not opposed to the TFSA at a $5,500 ceiling. Where our concern comes up is that when the ceiling is then raised, who gets the benefit?

According to your estimates, the wealthiest 20% of Canadians will get almost 10 times the benefit of the middle 20%—the middle class—and the top 20% by wealth will get nearly twice as much as the bottom 80% combined. The top 20% of income earners will get nearly 16 times more benefit from this one move than the bottom 20%.

On an equity level, is the top 20% in such trouble that they need initiatives that so overwhelmingly favour their bottom line?

[Mostafa Askari]

In the TFSA analysis, we tried to do the distribution allowances relative to income, relative to wealth, and also relative to age, and our conclusion was that overall most of the benefit of the TFSA over time, in the long run, will go to the middle and middle-high income group. But when you compare it on a wealth basis, then certainly those who have more wealth have more financial assets to put in TFSAs, so obviously the potential benefits for those people are much higher certainly.

[Nathan Cullen, NDP, Skeena—Bulkley Valley, BC]

Right. So Canadians who have that extra $10,000 at the end of the year are going to be the ones who mostly benefit from this, and from your analysis that tends to obviously skew towards wealthier Canadians who logically will have more money to put into something like a TFSA.

[Mostafa Askari]

Over time.

[Nathan Cullen, NDP, Skeena—Bulkley Valley, BC]

Over time. So when combining this with the government's choice to broaden out income splitting....

Again, we're in favour of it towards seniors. We see the equity that it goes across middle-, low-, and high-income seniors, but when income splitting is broadened out, 85% of Canadians receive no benefit whatsoever.

Now, we're also seeing that in the government's budget document, they gave us a preview of what the Conservatives think is a typical family. They've done this the last number of years. Interestingly, in this budget, the genders switched in terms of income. Previously, in the typical family, according to the Conservatives, the woman was earning more than the man, but not appreciably more, with only a $14,000 or $20,000 difference between their salaries. Now suddenly the typical family under the Conservatives' world view has the woman earning almost $50,000 less in order to achieve the maximum benefit under their income splitting. So she has to take a pay cut of $50,000 in order to get into that 15% cohort as a family. That's the Conservatives' typical family.

With income splitting, what is the general impact on the economy and what is the view of equity? Is it an equitable measure to apply to an economy that is not creating jobs right now and is overwhelmingly unfair?

[The Chair, Conservative, James Rajotte]

You have about 30 seconds for a response, please.

[Jean-Denis Fréchette]

Okay.

I just have a correction. The 15% household that you mentioned is related to the family tax cut, not to the TFSA.

[Nathan Cullen, NDP, Skeena—Bulkley Valley, BC]

No, I'm talking about that.

[Jean-Denis Fréchette]

So 15% of the families will receive higher benefits. The fiscal impact of the family tax cut, or what you call the income splitting, is $2.2 billion in 2015.

[The Chair, Conservative, James Rajotte]

Thank you very much, Mr. Cullen.

We'll go to Mr. Saxton, please.

[Andrew Saxton, Conservative, North Vancouver, BC]

Thank you, Chair.

Thanks to our witnesses from the PBO for being here today.

Let's continue on the line of the tax-free savings account. We introduced the tax-free savings account to help Canadians to save for the future, to save for their children's education, to save for that first down payment on a home, and also to save for their retirement. Eleven million accounts have been opened to date. It's the most successful savings vehicle since RRSPs. I'm also happy to note that the majority of those that have been opened have been opened by middle- and low-income Canadians.

Do you not think it's a good idea to give Canadians more choices in how to save for their future and to save for their priorities?

[Jean-Denis Fréchette]

Our report doesn't say anything about whether it's a good or bad idea. The report is essentially on the fiscal costs of such a measure and the long-term impact of it. I mean, saving is of course a good thing for everyone, depending on the capacity you have to save that kind of money.

But at PBO, we didn't make a judgment on the savings account itself or the validity of that account. We just essentially measured the long-term fiscal impact on government finances.

[Andrew Saxton, Conservative, North Vancouver, BC]

Right. The opposition Liberals and NDP have both said that they would cancel the increase in the tax-free savings account. There are also RRSPs that are being underutilized. So following that same logic, they would also cancel the amount of RRSPs that aren't being utilized.

Does that make any sense to you?

[Mostafa Askari]

There again, as I think Mr. Fréchette said, we don't pass judgment on the policies. But on the point of savings, in fact, in our report we looked at the literature in terms of the impact of tax measures on people's savings behaviour. Our conclusion from reading the literature was that there isn't really any conclusive evidence that tax measures can actually significantly improve the savings behaviour of individuals.

Now, the way we did our calculation in our report was that we looked at what amount of savings people have, what financial savings they have, and our assumption was that those financial savings that were in taxable instruments will be moved to non-taxable TFSAs, and that's how we measured. So it's not an issue of increased savings, it's just how you allocate your savings to different instruments.

[Andrew Saxton, Conservative, North Vancouver, BC]

In Canada we have a three-pillar system of savings. Have you looked in your report at the differences and benefits between mandatory—that's forcing people to save through things such as the CPP—versus voluntary savings, which would be the tax-free savings account and the RRSPs?

[Mostafa Askari]

No, sir, we did not.

[Andrew Saxton, Conservative, North Vancouver, BC]

Have you looked at the cost to the federal treasury of the RRSP system?

[Mostafa Askari]

There are some measures; I don't have those measures right now, but there are costs overall as a percent of the GDP. The RRSP, I believe, costs around 0.6% of the GDP right now.

[Andrew Saxton, Conservative, North Vancouver, BC]

Right now with RRSPs, that is money that goes in before taxes, so in fact the cost to the treasury is immediate, whereas for the tax-free savings account that is after-tax dollars. Those investors who have put money into tax-free savings accounts are putting in after-tax dollars. They've already paid taxes to the government, so therefore the potential cost to the treasury is actually down the road.

[Mostafa Askari]

Well, it's forgone revenue for the government, because if the financial asset moves from the taxable instruments to non-taxable TFSAs, that is forgone revenue for the government for that amount of money.

[Andrew Saxton, Conservative, North Vancouver, BC]

Right, but it's not an immediate hit because the tax is already paid immediately on it.

[Mostafa Askari]

Well, costs will go up over time as the contribution room increases, and that potential forgone revenue will increase over time.