Book Description
Tax-free savings accounts (quot;TFSAsquot;) became available in Canada in January 2009. A TFSA is a quot;tax prepaidquot; or quot;yield-exemptquot; 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 quot;newquot; 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.