Canadians Missing Out On Tax-Free Savings

by Mike Godfrey, Tax-News.com, Washington

17 October 2008

The most important new savings tool offered by government in over 50 years is facing a slow start unless more Canadians can be educated about it, according to a survey sponsored by Investors Group.

Slightly less than half (46%) of Canadian adults plan to open a Tax-Free Savings Account (TFSA) when it becomes available and only about one in six (17%) plan to contribute the maximum amount.

According to the survey, the majority of people who do not plan to invest in a TFSA seem to be held back by a lack of knowledge with 46% saying either they were uncertain about how it worked, preferred to wait and see or did not know. By comparison, only 21% cited a lack of money as the reason they do not plan to invest in a TFSA.

“The TFSA presents Canadians with an opportunity to reduce taxes and use their savings with greater flexibility,” said Debbie Ammeter, Vice President, Advanced Financial Planning Support at Investors Group. “It’s worth learning more about the TFSA and incorporating it into your overall investment strategy.”

Over three-quarters (78%) of those who plan to open a TFSA believe it will save taxes for them, making that benefit a driving force in their decisions. However, it appears that those quick on the uptake are motivated savers in the first place: six in ten (58%) plan to invest in a TFSA in addition to their Registered Retirement Savings Account (RRSP).

TFSAs, announced by Finance Minister Jim Flaherty in the 2008 budget earlier this year, will allow Canadians to invest up to CAD5,000 a year in tax-free accounts, beginning in 2009. Investment income earned within the account, including capital gains, will not be taxed, and withdrawals will be tax-free.

According to Benjamin Tal, Senior Economist at CIBC World Markets, the TFSA market could be worth CAD115bn (USD107.5bn) by 2013 with cumulative tax savings of close to CAD2bn.

In his Consumer Watch Canada Report last month, Tal noted that the TFSA plan is "arguably the most dramatic change in Canada's savings system since the introduction of the RRSP," although he thinks that the new savings vehicles should be viewed as a "companion to the RRSP" not a rival. Nonetheless, he expects about 400,000 low-income Canadians that currently contribute to an RRSP will switch to a TFSA.

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