At the beginning of January, Francis Vailles appealed to young people to learn about the CELIAPP1, an investment vehicle that combines the tax advantages of RRSPs and TFSAs to promote access to real estate ownership for first-time buyers. If an individual’s income is $50,000 and he contributes the maximum allowed annually – $8,000 – he will only be taxed on $42,000, as for an RRSP. In addition, capital gains on the money saved are not taxable, like the TFSA.
Although the CELIAPP seeks to promote the down payment of first-time buyers, this program seems to have been put in place more to attract a category of voters crucial to the electoral prospects of the Liberal Party of Canada, namely relatively affluent young people.
Yet this program ignores the source of the housing crisis: a deficiency in the supply, more precisely, of the supply of affordable housing. Worse, by favoring certain buyers, it could contribute to exacerbating the crisis by increasing demand for the purchase of a new property.
Last year, we highlighted our disagreement with this investment vehicle and proposed transforming the TFSA into a climate action fund2 to accelerate the energy transition. Our position is still the same, but we want to illustrate the regressive aspect brought about by the triple coexistence of the main savings accounts.
The RRSP includes annual contribution room of 18% of income, the TFSA allows $6,500 of contribution per year and the TFSAAPP offers $8,000 of annual contribution room. For the average Quebecer, that’s a lot (too much) of savings. Already, only a minority of the population contributes to RRSPs and TFSAs, while 35% of households do not benefit from these savings accounts and the contribution rate increases directly with household income. Thus, not only do these savings accounts mainly benefit the more affluent who contribute more and receive greater tax reductions, but also these programs are very costly for the public purse – the TFSA alone has cost nearly 2 billion in 2020. As the returns are compounded on a tax-sheltered basis, this bill will only increase over time, especially since once in place, the elimination of these programs would have electoral consequences that the parties seek to avoid at all costs.
To illustrate the inequity resulting from the duplication of these three savings accounts, here is a case study.
Anna has an annual income of $50,000, more than the median Canadian. She is considering buying her first property; with the three funds, she has $23,500 in annual contribution room. Logically, the first 8,000 dollars will go directly into the most generous of the three funds, the TFSA, while the next 9,000 dollars of savings will go to the RRSP in order to increase the down payment as much as possible. Anna is therefore taxed on $33,000, leaving her with $25,500 of disposable income. Since it is essentially subsistence income, she will not be able to contribute to the TFSA. Anna is very thrifty, as her 34% savings is a particularly high rate; the savings rate for Quebecers is 8%.
Conversely, Charles has an income of $100,000. After RRSP contribution ($18,000) and TFSA ($8000) and after taxes, Charles has $52,000 to contribute to his TFSA. He can therefore contribute $6,500 to his TFSA, bringing his savings rate to 32.5%.
Let’s imagine that these two individuals are 25 years old and are saving in this way for five years to acquire their first property at 30 years old. At a compound interest rate of 5%, Charles’ $32,500 TFSA contribution equals $210,000 at age 65. At an effective tax rate of 30%, Charles’ TFSA is costing the government $52,500 in taxes in just five years of TFSA contributions. Worse still, Anna – who had a higher savings rate than Charles – receives nothing.
The creation of a third savings program is a perfect storm to stimulate inequality. This triple coexistence does nothing for the average Quebecer, in addition to being particularly costly for the state. If the objective is to solve the housing crisis, we believe that public funds would be better invested elsewhere than in the addition of the TFSA.