Family-level responses to the introduction of Tax-Free Savings Accounts

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Résumé (français)

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Résumé (anglais)

This paper presents evidence on the effect of the introduction of Canadian Tax-Free Savings Accounts (TFSAs) on the savings of families with children. Contributions to TFSAs are not tax-deductible but capital income earned in the account accrues tax-free and withdrawals are not taxed. Using a difference-in-differences instrumental variables research design that exploits the sharp change in a family’s cumulative TFSA contribution room that arises when a child turns 18 years old, I find that a 1 increase in family-level TFSA balances lowers taxable financial asset holdings by approximately .25 to $0.45 and has no statistically significant effect on holdings in traditional tax-deferred accounts. My results suggest that having an additional adult family member eligible to open a TFSA increases the TFSA contributions and account balances of both adult children and their parents.