Assessing Tax-Free Savings Accounts: Promises and Pressures
29 Pages Posted: 15 Dec 2008 Last revised: 11 Sep 2011
Date Written: October 19, 2009
Tax-free savings accounts ("TFSAs") became available in Canada in January 2009. A TFSA is a "tax prepaid" or "yield-exempt" investment account that does not provide any deduction for contributions and allows for tax-free compounding of investment returns in addition to tax-free withdrawals at any time. This article examines the theory surrounding tax-prepaid and tax-postpaid accounts and shows that there are important theoretical and practical differences in how the two types of tax-advantaged savings accounts operate. The paper predicts that the TFSA regime will not provide a significant incentive to save and that most contributions will not be "new" savings but will be amounts that would have been saved in any event or, equivalently, will be assets shuffled from taxable savings into the tax-free accounts.
Suggested Citation: Suggested Citation