The Distributional Impacts of Canada's Tax-Free Savings Accounts

Abstract

Since 2009, Canadians have had the opportunity to contribute to tax-free savings accounts (TFSAs). This study provides insight into the attributes of the TFSA participants. I use data from the Canada Revenue Agency (CRA) for general participation trends and the 2012 Survey of Financial Security (SFS) to examine the socioeconomic characteristics of participants and their contributions. Examining data from the CRA, I find that the majority of tax-filing Canadians did not participate in the TFSA program by 2012, with age and income level affecting participation and contribution decisions. Evidence from the SFS data corroborates the evidence obtained from the CRA data. I find that households with children or households headed by individuals with less than post-secondary education are less likely to participate. In addition, I find that households with greater liquidity are more likely to participate and contribute more. Consequently, I conclude that TFSAs are likely to have an economically significant distributional impact, making them less attractive on distributional grounds under the current structure.

Keywords: Tax-Free Savings Accounts; TFSA; Survey of Financial Security

JEL Classification: D14; D91