TORONTO - Canadians will have a new way to boost their investments this week with the introduction of tax-free savings accounts -- but the plan has left some observers questioning whether putting aside more cash is the right move amid recessionary times.
Typically, governments want people to spend more money when the economy is struggling because it stimulates growth and keeps consumers confident.
But when Ottawa unveiled the concept in its budget last February, the economy was thriving and showed few signs of slowing down. That's one reason why Finance Minister Jim Flaherty picked Jan. 1, 2009 as the debut of the new tax-free accounts.
The plan offers Canadians aged 18 or older an account where they can invest up to $5,000 each year in the account and allow its holdings to grow tax-free.
Eligible investments include guaranteed investment certificates, bonds, mutual funds and stocks.
When the concept was first unveiled it seemed like an innovative approach to saving for the future without getting whacked by some of the usual charges associated with hanging onto money.
"We were shifting from a society of passive savers to a society of active savers," CIBC World Markets economist Benjamin Tal said
"People didn't bother with old fashioned saving because if you doubled the value of your real estate during the course of breakfast -- that was your savings."
Since the plan's initial unveiling the investing landscape has changed.
The Toronto Stock Exchange's main index has tumbled 40 per cent from start of 2008, housing sales and prices have fallen, and companies are warning that the coming year could be one of the most difficult times in recent memory.
Canadians are slamming the breaks on impulse buys and risky investments.
The Conference Board of Canada found that consumer confidence in December was at its lowest level since 1981-82, when Canada suffered its worst post-war recession.
The focus now is on keeping Canadians optimistic about the country's economy, and discouraging them from hoarding too much cash away in their banks accounts.
The attitude shift has left some investors questioning whether now is the right time to be debuting the tax-free savings account.
"When you really want people to be out spending it's probably not the greatest time to be introducing it," said Chyanne Fyckes, chief investment manager at Stone Asset Management.
The government "should've delayed it by at least a year -- but it's too late," she said.
Unlike the well-established registered retirement savings plans, investors won't get an up front tax reduction for putting money into a TFSA.
But the investments won't be taxed, withdrawals aren't taxed and there's no requirement for making withdrawals by a certain age, as with RRSPs and registered retirement investment funds.
Brendan Caldwell, president of Caldwell Securities, suggested the new accounts will help Canadians curb their exuberant spending habits.
"We've spent like drunken sailors for a very long time -- no offence to drunken sailors," he said.
"I don't think we need any more incentives to go out and spend."
Caldwell quashed suggestions that Ottawa should have canned the plan once the economy took a dive.
"You can't introduce a major government initiative wondering what the impact is going to be over the next 18 months," he said.
Tal says once the tax-free accounts debut, they will slowly gain popularity because the tax savings will motivate Canadians to put money in places that'll benefit them in the long run.
"One of the reasons why this recession is becoming so painful is because of the fact that the savings rate was zero," he said.
Tal suggested cautious saving should be expected in this uncertain climate.
"True, you would like to see people spending now," Tal said. "But the unfortunate reality is that we have a situation in which you will see savings rising because that's exactly what happens during a recession."
He predicts that Canadians will invest $20 billion in the tax-free accounts in 2009, but that the amounts will balloon to $120 billion by 2013.
