Poilievre has proposed allowing Canadians to contribute an extra $5,000 per year to TFSAs “if that money supports Canadian companies that employ Canadian workers and pay Canadian taxes,” according to a press release. (Credit: Shaughn Butts/Postmedia files)
The Conservatives have proposed to let Canadians top up their tax-free savings account (TFSA) with an extra $5,000, but only if the money goes toward qualifying Canadian investments.
“It will bring home billions of dollars of investment and jobs to Canada,” Conservative Leader Pierre Poilievre said in a video announcing the proposal.
Here, the Financial Post examines the proposal and what it would mean for Canadian savers.
First, a little background. TFSAs were first introduced in 2009 to help Canadians grow their money tax-free. TFSAs can hold cash and investments, including stocks, bonds, guaranteed investment certificates (GICs), mutual funds and exchange-traded funds (ETFs).
There’s a limit on how much you can contribute each year, and TFSA contribution room starts accruing from 2009 or the year you turn 18. If you don’t max out your TFSA, all unused contribution room rolls over to future years. For 2025, the annual contribution limit is $7,000 and the total lifetime contribution limit now sits at $102,000.
The Conservatives have proposed allowing Canadians to contribute an extra $5,000 per year to their TFSAs “if that money supports Canadian companies that employ Canadian workers and pay Canadian taxes,” according to a press release.
“Instead of rewarding people for taking jobs and money out of Canada, we need a tax cut for those who bring it home,” Poilievre said in the announcement video.
This is one question the Conservatives have yet to answer. Their proposal said “the tax system already defines Canadian investments,” but acknowledges they would need to “create a definition that lets financial institutions and advisers label which stocks, mutual funds and other investments” qualify for the top-up investment.
“It would certainly require some work,” Jamie Golombek, managing director of tax and estate planning at CIBC Private Wealth Management, said.
He said there is some precedent since plan issuers were required to track Canadian versus foreign investments held in registered retirement savings plans (RRSPs) and registered retirement income funds (RRIFs) between 1971 and 2005, when the Income Tax Act capped the percentage of foreign investments that could go into those accounts.
The Income Tax Act defines what constitutes a “qualified investment” for TFSAs and other types of registered accounts. Some tax and finance experts say they aren’t sure how the Poilievre camp would define Canadian investments.
The big benefit of a TFSA is the tax-free compounding that takes place over a long time horizon, and the $5,000 expansion would create a significant amount of new lifetime savings potential.
If a TFSA holder invested $5,000 per year for the 47 years between age 18 and age 65 and earned a five per cent rate of return, they would have more than $890,000 in their TFSA at retirement. At a seven per cent annual rate of return, the investor would have more than $1.6 million at retirement. Unlike an RRSP, that money can be withdrawn tax free.
“In my personal view, any tax measure that encourages more Canadians to save is helpful as it encourages taxpayers to put away their own money for the future rather than having to rely on future government support,” Golombek said.
The Conservative’s proposal would bring the total TFSA annual contribution limit to $12,000.
The Conservatives didn’t include a cost estimate in their proposal. In 2015, a Parliamentary Budget Officer (PBO) report on the fiscal impact of the TFSA program estimated that doubling the TFSA contribution limit from $5,500 to $11,000 could cost the government $4.2 billion in lost tax revenue by 2030, $22.3 billion by 2060 and $39.3 billion by 2080. Overall, the cost of the TFSA program would increase 34 per cent by 2080.
However, the report said potential incremental contributions could be limited over time because “a declining share of households will have taxable financial assets available to contribute to TFSAs.”
“The TFSA is a tremendous vehicle for saving for a wide variety of Canadians,” Josh Sheluk, a portfolio manager and chief investment officer at Verecan Capital Management Inc., said.
He said the Conservatives may face a few implementation hurdles because financial institutions would need “cohesive guidance” on what constitutes a Canadian investment. He said the Conservatives would also need to define how long investors need to hold Canadian investments in their TFSA before they’re allowed to sell.
“My opinion is that we should be trying to get Canadians to invest and grow their wealth in the best possible way so they can then turn around and spend that wealth effectively here in Canada,” Sheluk said. “Anytime you put limitations on what somebody can invest in, you’re potentially limiting their ability to grow their wealth in the most sensible way.”
He said increasing TFSA contribution room is generally helpful, but may not have a broad effect because only a small percentage of Canadians max out their contribution room every year. Out of 17.7 million TFSA holders, just over 1.5 million people maximized their contributions, according to the latest statistics from the Canada Revenue Agency.
“It’s likely that doing so would disproportionately benefit the wealthier cohort of Canadians, those with enough assets to max out their TFSAs,” Sheluk said.
The PBO report from 2015 backs this up: “increasing the annual contribution limit would predominantly benefit the wealthiest 20 per cent of households.”
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