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Academic

: University of Toronto Law School Faculty Blog

Ben Alarie - Tax-Free Savings Accounts

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I've posted a new paper on SSRN that analyzes the new "tax-free savings accounts" that are soon to be available in Canada (they will be coming to a financial institution near you in January). You may recall having seen one (or more) of the now ubiquitous advertisements for the accounts. Here's the abstract of the paper:

Tax-free savings accounts ("TFSAs") will be 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 TFSAs, briefly outlines the empirical evidence from the UK and the US with similar accounts, and identifies the consequences that are likely to emerge with the advent of TFSAs in the existing Canadian tax system. TFSAs can be expected to generate some modest new savings by Canadians with low and middle incomes and to give rise to asset shifting from taxable investments to TFSAs by those who have savings that are currently held outside of tax-advantaged accounts. The analysis suggests that the TFSA regime should probably be regarded ambivalently from the perspectives of efficiency and equity on account of having a small effect on savings and investment behaviour that will come at the cost of significant forgone tax revenue.

The paper is entitled, Assessing Tax-Free Savings Accounts: Promises and Pressures. As this work is still preliminary, I welcome any comments or suggestions you may have.

Full post as published by University of Toronto Law School Faculty Blog on December 12, 2008 (boomark / email).