New Tax Free Savings Accounts will jumpstart Canadian savings rate after years of decline

Sep 11, 2008


    Most dramatic change in Canada's savings system since the RRSP will
    result in an additional $115 billion to be "socked away" by 2013, says
    CIBC World Markets report

    TORONTO, Sept. 11 /CNW/ - CIBC (CM: TSX; NYSE) - Socking money away is
becoming a bigger priority for Canadians, and that trend will likely lead to a
huge uptake in the new Tax Free Savings Account (TFSA) plan which will be
introduced to Canadians in January 2009, notes a new CIBC World Markets
report.
    "The TFSA will kick in exactly when many Canadians are making the
transition from passive savers to active savers," says Benjamin Tal, Senior
Economist at CIBC World Markets in his Consumer Watch Canada Report. He
expects the TFSA market to mushroom to $115 billion by 2013 with cumulative
tax savings of close to $2 billion.
    Mr. Tal says changes in the economy are driving Canadians to rethink
their savings habits for the first time in 20 years. He notes that an extended
period of low interest rates, modest inflation, slow income growth and soaring
home prices over the last two decades made Canadians feel less pressured to
save. These factors contributed to a dramatic drop in the savings rate, and
greater reliance on increases in home equity to offset the savings shortfall.
    "But now, the levelling off in house prices is stripping households of
one of their most important means of savings," says Mr. Tal. "And just when
Canadians are ready to go back to old fashioned savings behaviour, the
introduction of the TFSA will provide them with an additional tool to raise
their active savings."
    He notes that the TFSA plan is "arguably the most dramatic change in
Canada's savings system since the introduction of the Registered Retirement
Savings Account (RRSP)" and that it should be viewed as a "companion to the
RRSP" not a rival. "The magic behind the TFSA is in its versatility. It is not
simply a tax measure designed to help low-income Canadians, but rather a
vehicle that can fit almost every Canadian, regardless of income or stage of
life."
    As a result, Mr. Tal expects about 400,000 low-income Canadians that
currently contribute to an RRSP will switch to TFSA. That translates into
$2.5 billion in cumulative contributions from this group over the next five
years. "The current system discourages low-income Canadians from contributing
to RRSP since their withdrawals after retirement might reduce the eligible tax
credit and supplementary pension payments. In contrast, the TFSA is truly tax
exempt-free of any clawbacks from federal tax credit and benefit programs,"
says Mr. Tal.
    For seniors, the "TFSA is an attractive channel to save beyond the
current cut-off age of 71 for making RRSP contributions," says Mr. Tal. He
adds that TFSA account assets can be transferred to a surviving spouse or
child, tax-free without affecting the beneficiaries' contribution rooms.
    The TFSA also benefits high earners who've reached their RRSP
contribution limit, and want to build additional savings tax free. For the
nearly 40 per cent of paid workers that are covered by a registered pension
plan, the TFSA can also help compensate for the pension adjustment that limits
RRSP contributions.
    Mr. Tal notes that another key feature of the TFSA is its flexibility
makes it ideal for immediate needs such as emergency funds as well as a tax
efficient way for Canadians to finance consumption. "The account can be
accessed multiple times during one's lifetime to serve as emergency funds, and
to bridge periods of income volatility. This liquidity feature of the TFSA
plan is of great importance as it will probably work to limit or even
eliminate uneconomical behaviour such as RRSP withdrawal. In fact, the
liquidity feature is viewed by Canadians to be as important as the tax-free
feature in the decision to open a TFSA."
    To assess the potential popularity of TFSA, Mr. Tal reviewed the U.K.'s
experience with a similar plan, and the results of a recent Harris/Decima
survey measuring Canadians intentions to use these accounts.
    Based on the findings, he expects more than 40 per cent of Canadians are
likely to use new money in contributing to the TFSA. This means the plan
itself will increase the savings rate among Canadians, and not siphon away
existing contributions from RRSPs. He believes that a significant portion of
the money parked in TFSAs will be in cash and cash equivalent accounts, an
assumption supported by the Harris/Decima survey.
    He also believes that TFSA usage by age and income level will be similar
to Britain. There, half of high income individuals contribute to an equivalent
plan compared to 30 per cent with lower incomes. Also, people 55 and older
contribute more than other age groups.
    Since the launch of the plan in Britain in 1999, the number of accounts
has risen at an average rate of six per cent a year. And with the British
adult population hardly changed over the past decade, the share of U.K.
citizens that use the plan rose to 37 per cent in 2008 from 22 per cent in
2000, notes Mr. Tal.
    In 2009, the first year of the program, Mr. Tal estimates that Canadians
will contribute $20 billion to TFSAs, and like the British, "continue to use
the vehicle at an impressive rate."
    The complete CIBC World Markets report is available at:
http://research.cibcwm.com/economic_public/download/cwcda-080911.pdf.

    CIBC World Markets is the wholesale and corporate banking arm of CIBC,
providing a range of integrated credit and capital markets products,
investment banking, and merchant banking to clients in key financial markets
in North America and around the world. We provide innovative capital solutions
and advisory expertise across a wide range of industries as well as top-ranked
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For further information:

For further information: Benjamin Tal, Senior Economist, CIBC World
Markets at (416) 956-3698, benjamin.tal@cibc.ca; or Kevin Dove, Communications
and Public Affairs at (416) 980-8835, kevin.dove@cibc.ca


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