No big deal

The new tax-free savings account is bound to appeal to investors who got snookered by last fall’s market crash. What could be better than earning money and paying no tax!

But for the life of me, I can’t see the big deal in being able to invest $5,000 annually and not pay any tax on either income earned or capital gains. The trade-off for no tax is that the annual $5,000 investment does not bring any immediate benefit in the form of a tax deduction as happens with an RRSP contribution.

The official example given by the Department of Finance says that if you save $200 a month for twenty years in a tax-free account, you’ll end up with $11,045 more than if you didn’t have a tax break. Sounds great, but the example assumes you can earn a 5.5 per cent rate of return during those twenty years. How likely is that? In order to earn that kind of return over the long term you’d have to have a portfolio of stocks and bonds that the average person who opens one of these accounts isn’t likely to create.

I think a more likely interest rate will be closer to 3 per cent, something that will produce an “extra amount that’s half the $11,000, or about $5,500. Not a number to be sneezed at, to be sure, but after a wait of twenty years? That’s a plus of only $275 a year, some of which will have been gobbled up by inflation.

Hardly seems worth the trouble to set up and oversee a special account for such a piddly amount. This looks like something that will appeal to folks who like Canada Savings Bonds. Come to think of it, that might have been the best place to stash everything in recent years.