Economists met by The duty question the merits of the tax-free savings account (TFSA) and the registered retirement savings plan (RRSP). According to them, these two tax measures, which cost the government billions of dollars annually, benefit the wealthiest individuals more and increase economic inequality.
“These are programs for the rich. That’s not what we said when we created them, but that’s what happens when you look at the data,” says David Macdonald, senior economist at the Canadian Centre for Policy Alternatives (CCPA).
An analysis note from the Quebec Observatory of Inequalities (OQI) published last November listed the distribution of all amounts invested in RRSPs and TFSAs. by wealth bracket, measured by net worth. Thus, the wealthiest 20% of individuals hold 55% of the amounts invested in a TFSA and 70% of those invested in an RRSP. Conversely, the least wealthy 20% of individuals, for their part, hold 1% and 0% of the kitty contained in these two tools, respectively.
Several factors explain this disparity. “To benefit from these programs, you must have the ability to save and therefore the income to save,” says researcher Julia Posca of the Institute for Socioeconomic Research and Information (IRIS). In addition, “the deduction reduces tax depending on the situation [des contribuables] in the tax scale, so the aid is more generous for the wealthiest,” adds tax specialist Luc Godbout, professor at the University of Sherbrooke.
In the case of the TFSA, where investment interest is not taxable, the maximum contributions are set at $7,000 for the year 2024, for a possible total of $95,000 for anyone who has been eligible to contribute since the program began in 2009. Although this savings vehicle is open to everyone, those who find themselves unable to use it to its full capacity are at a disadvantage.
As for the RRSP, not only must you have enough funds available to contribute, but the maximum value of the contributions, which are tax deductible, is itself directly linked to income. The limit allowed is 18% of annual employment income, although it is capped for taxpayers with a salary greater than $171,000.
“With the RRSP, we have to be careful with the statistics,” warns Mr. Godbout, since a good number of taxpayers also have access to other tax measures that encourage retirement savings, such as registered pension plans. The analysis would be more complete and the results less pronounced by considering both programs at the same time, although, according to the researcher, the phenomenon would remain the same.
Large tax expenditures
“There is a range of tax measures that disproportionately benefit a handful of better-off people, but also deprive the State of significant revenue to ensure its vision,” notes economist Geoffroy Boucher of the OQI.
Both levels of government are seeing their revenues greatly reduced by the TFSA and RRSP tax deduction programs. These tax expenditures would exceed $6 billion in Quebec in 2023, according to the Quebec Ministry of Finance.
Given the unequal nature of these measures, the four experts met by The duty wonder whether all this money could not be better invested. They all suggested that enhancing existing public retirement programs, such as the Quebec Pension Plan, would be more effective than maintaining the TFSA and the RRSP.
According to a Léger poll conducted last March for the Association pour la santé publique du Québec, 84% of the Quebec population is also in favour of greater government investment in public retirement programs, the most popular potential investment in the poll to reduce wealth inequality in Quebec.
For Mr. Boucher, it is also essential to “act upstream on the reasons why people do not have money at the end of the month to save”, such as by financing social and community housing. Such a measure “would have a significant downward impact on the price of the real estate market”, lessening the effects of the housing crisis, according to the economist.
For Mr. Macdonald, all of Canada’s tax deductions should be questioned, unequal or not, when together they produce tax expenditures of $100 billion a year, or about 5 per cent of the entire Canadian economy. “Eliminating poverty is a possibility with numbers like that,” he notes.
A political question first
“Inequalities in wealth or income are not inevitable; they are influenced by the policies we have put in place,” says Mr. Boucher. “Governments can absolutely play an important role in reducing inequalities. We have all the levers to do so; we just need the political will to activate them.”
According to experts, we must question who really has the power to influence political choices. “We have a political class with an over-representation of the wealthier classes and these are tax advantages that benefit them,” says Mr.me Posca. On the other side of the coin, “people who do not benefit from these measures are not vocal people, or at least who have access to means to assert their opinion,” observes Mr. Boucher.
Moreover, “there is often a difference between the discourse [au sujet des déductions fiscales] and the effect of the measures in reality,” adds Mr.me Posca. However, if we put politics aside, “it is more profitable to help the poorest people than to help the richest, on an economic and social level,” she says. The money spent by the former on their basic needs “goes back into the economy” and partly into government coffers through taxes, while the wealthiest turn to “financial and speculative assets” and sometimes use “tax avoidance strategies,” according to the researcher.
“The tip of the iceberg”
“The RRSP and the TFSA are just the tip of the iceberg,” illustrates Mr. Boucher. Many other tax measures disproportionately benefit the wealthiest, including the tax-free savings account for first-time home buyers (TFSA), introduced last year.
For Mr. Godbout, it is above all this accumulation of programs that makes it impossible for the majority of households, even those in the middle class, to benefit at the same time from all the available tax measures.
A CCPA study released in April assesses the total tax rate for taxpayers, taking into account all sources of taxation (including consumption taxes and municipal, provincial and federal taxes) on all types of income (taxable and non-taxable). It concludes that the tax system as a whole becomes regressive for the highest incomes. For example, for the top 20% of Canadians, as income increases, the proportion of income taxed decreases, on average.
This phenomenon becomes particularly pronounced at the upper end of the distribution, where the total tax rate for the top 1% of individuals is lower, on average, than the tax rate for any other income bracket.
Taxing the wealthiest less, through programs such as TFSAs and RRSPs, ultimately contributes to the concentration of wealth. A report from the Parliamentary Budget Officer estimates that the wealth held by the richest 1% reached 24.8% of total net worth in Canada in 2019.
“Right now, the rules of the game are not fair for everyone, they contribute to exacerbating inequalities,” concludes Mr. Boucher.