The “Canada First TFSA Top-Up” – A Policy Analysis
You may have heard that the Conservative Party of Canada (CPC) has proposed the introduction of the “Canada First TFSA Top-Up,” a plan to allow Canadians to contribute an extra $5,000 in their Tax-Free Savings Accounts (TFSAs), as long as the amount qualifies as a Canadian investment.
This policy has the potential to influence the investment landscape in Canada, particularly with its focus on “Canadian investments,” which most likely refers to equity or bond investments in Canadian companies or government securities. In this blog post, I will examine CPC’s intentions and the potential consequences, both positive and negative.
The Problem the CPC is Trying to Solve
Promoting Canadian Economic Growth
The Objective
As I understand it, the objective of this proposal is to encourage Canadians to invest more in their own country, specifically Canadian enterprises, by providing additional room in TFSAs for Canadian-domiciled investments. No doubt, this proposal is a response to the pressures via tariffs from the Trump administration that are, if the US president is to be believed, intended to weaken Canada economically and force an inevitable annexation of Canada by the US. In that sense, it is an additional method of increasing Canada’s strength that will be added alongside the current government’s efforts to reduce internal trade barriers.
The Need for Capital in Canada
Canadian companies often struggle to access capital for investment. We are dominated by our big six banks, which tend to be risk-averse, and when companies do list in Canada, many will “cross-list” on a US exchange to access investment assets from US institutional investors. The TFSA top-up policy aims to create an environment where additional capital, exclusively for Canadian businesses is made available.
Enhancing Canadian Investment Options in TFSAs
Current Restrictions
Aside from contribution limits, Canada’s TFSAs have no more restrictions on investing than do RRSPs. That means you can hold exclusively foreign investments, like a fund that tracks the US S&P 500 index, for example. Although Canadians have historically shown a significant home bias, many Canadians are less focussed on investing in domestic securities.
The Goal
By adding to the contribution limit, but only for Canadian investments, the CPC is seeking to direct Canadian savings to Canadian businesses, stimulating national economic development and improving the viability of Canadian-issued equity and debt offerings in the capital markets.
The Broader Economic Impact
The Long-term Strategy
The policy aims to make Canadian markets more attractive to domestic capital, and by extension, foreign capital, too, by increasing domestic participation in Canadian markets. This would enhance liquidity, i.e., more transactions at fair prices, encourage more Canadian corporations to issue equity (stock) or debt (bonds), and lower costs for Canadian businesses.
The Pros of the “Canada First TFSA Top-Up” Policy
Benefits to Canadian Businesses and the Economy
Boosting Capital Access
It seems likely that increased investment in Canadian equities and bonds would also increase the capital available to Canadian enterprises. For example, a Canadian tech startup could potentially benefit from a larger pool of investors, now searching for additional investment opportunities within Canada, who would then buy its shares, which would in turn lead to greater funding for the company to innovate and grow.
Increased Liquidity
It is reasonable to expect that, by encouraging more investment in Canadian companies, the policy could make it easier to buy and sell Canadian stocks and bonds. This increased market activity could also attract more interest from foreign investors, further strengthening Canada’s financial markets and contributing to a healthier overall economy.
Positive Impact on National Savings
Aligning Canadian Savings with Canadian Needs
The TFSA top-up policy, if implemented, could direct savings from Canadian households into Canadian businesses, albeit indirectly via the secondary market, aligning individual saving behaviour with the needs of the domestic economy.
Canadian retirees, as an example, already incentivized by their stage of life to look for lower-risk investment returns from their money, could choose to contribute a greater proportion of their assets in a TFSA to invest in domestic issuers of bonds from corporate or government sources.
Encouraging Long-Term Investment in Canada
Wealth Building for Canadians
The tax-free growth allowed within TFSAs already helps Canadians accumulate more wealth. Adding this additional $5,000 for investing in domestic businesses, without facing the burden of taxation on the returns, would assist both the Canadian economy and Canadian households looking to invest for the long term.
What kind of difference might this make? A long-term investor contributing an extra $5,000 per year over 20 years, and receiving a return of 5% per year, could expect to have an additional $165,000 of tax-free assets at the end of those 20 years.
The Cons of the “Canada First TFSA Top-Up” Policy
Potential Exacerbation of Wealth Inequality
Disproportionate Benefits for High-Income Canadians
It is an obvious observation that higher-income earners have a much easier time contributing the annual maximum to their TFSAs and consequently benefit more from the tax-free growth. Thus, the proposed top-up will mean that high-income earners can shelter an extra $5,000, while lower-income individuals, who do not have the same capacity to save, may not see similar benefits. Consider that the average TFSA balance was about $45,000 at the end of 2024. Those of the baby boom generation averaged about $72,000. Given that the cumulative contribution limit for those eligible since 2009 was $95,000 in 2024 (it is $102,000 as of 2025), this means that many Canadians do not maximize their TFSA contributions.
Wealth Inequality
As the paragraph above indicates, one thing this policy risks doing is to concentrate even more wealth in the hands of high-income Canadians, who already have the ability to maximize their RRSPs and can invest in tax-efficient ways in their non-registered accounts. The concern here is that this could exacerbate wealth inequality, a rather ironic outcome given that one of the intentions of the TFSA was to provide a tax-efficient means of saving for the long term for those with lower incomes who would not meaningfully benefit from the tax deduction available through RRSP contributions.
Erosion of the Canadian Tax Base
Reduced Tax Revenue
One of the significant criticisms of increasing TFSA limits is that it reduces government tax revenue over the long term. Now this may not be a matter of concern for the CPC since they generally favour lower taxes. However, as more income is sheltered from taxes, the Canadian government may face long-term challenges in funding social programs and services.
As an example, consider a high-income individual who can take advantage of the top-up. She could protect even larger amounts of capital gains, dividends, or interest from tax, reducing the amount of taxable income the government can collect. This gradually undermines the tax base over time. Contrast this with a lower-income household with children that receives the Canada Child Benefit (CCB). They probably don’t have enough income to maximize their TFSAs but at least they have the CCB to help them manage the expenses of providing for a young family. Low-income seniors who qualify for Old Age Security (OAS) and the Guaranteed Income Supplement (GIS) also benefit from the tax revenues that are collected. Both demographic categories – families with young children and lower-income seniors – benefit from the taxes that are collected. I think I can say that all Canadians benefit as well because of the decrease in poverty thanks to these programs.
Reduced Investment in Non-Registered Accounts
By offering more shelter in TFSAs, the policy will inevitably cause higher-income earners to shift away from using non-registered accounts. Income earned within non-registered accounts is taxable in the year it is received, whether paid in the form of dividends, interest, or capital gains. This shift means that some of the income that would have been taxable is no longer taxed. While $5,000 per year may not make a huge difference for the wealthy, the cumulative effect over the long term, will be an erosion of the tax base.
Limited Immediate Impact on the Economy
Indirect Impact on Canadian Economic Prospects
While the TFSA top-up policy might help increase investment over the long term, it’s unlikely to result in an immediate boost to Canada’s economic prospects. The impact of additional savings in TFSAs would be gradual, rather than provide a sudden contribution of funds into the economy.
To illustrate, if a large portion of the $5,000 top-up is invested in large-cap Canadian stocks like those of banks or energy companies, these investments are unlikely to immediately fuel the kind of growth that the CPC suggests will come. Ideally, this money would be best suited for smaller or early-stage Canadian businesses that require investments to grow, and those types of businesses may not even be available to purchase within a TFSA.
Other Considerations and Nuances
The Broader Effect of Holding Assets in the Secondary Market
Impact of Secondary Market Investments
Most investments, particularly those in ETFs or mutual funds, are bought and sold on the secondary market, which means there’s no immediate impact on the capital raised by businesses. The secondary market provides liquidity, that is, the ability to buy or sell an investment, but these transactions are largely between investors and do not provide fresh capital for companies. That “fresh capital” comes from private venture money in the early stages, Initial Public Offerings (IPOs) when a company first starts to trade on the market, and new issues of stocks and/or bonds when an existing firm is looking to raise more money.
Consider a Canadian Equity ETF that holds shares of a Canadian bank. The bank has already issued those shares. While the ETF offers liquidity for investors, it doesn’t directly provide capital to the bank for new projects or expansion.
The Role of Mutual Funds and ETFs in Supporting Canadian Investments
Challenges of Direct Investment
While the policy focuses on encouraging Canadian investments, the mutual funds and ETFs that most Canadians hold rely on secondary market transactions. Again, this means that an investment in this manner will not raise new capital for businesses.
Asset Allocation Distortion and Home Bias
Speaking now to the impact on the investor, assuming that the investor has the capacity to invest an additional $5,000 into her TFSA, the requirement that it be invested exclusively in Canadian assets could skew an investor’s overall portfolio, especially for younger or growth-oriented investors who may have little or no allocation to fixed income. For instance, if the investor’s TFSA limit is $12,000 (regular $7,000 plus $5,000 top-up), and the $5,000 must be allocated to Canadian equities, that results in a minimum Canadian exposure of 42%, well above the 25–30% typical in globally diversified all-equity ETFs such as VEQT, ZEQT, or XEQT.
This shift could reinforce home bias, reducing the diversification benefit of holding global equities and potentially affecting long-term risk-adjusted returns. Older investors, or those with larger TFSAs, may simply sell off a portion of their Canadian investments already in their accounts so that their desired asset allocation is maintained. This will nullify the intended benefit except for the frictional costs that are incurred every time a transaction occurs.
Closing Thoughts
Balancing Growth and Equity
While the “Canada First TFSA Top-Up” policy could stimulate the Canadian economy by directing investment toward Canadian businesses, its potential to widen the wealth gap and erode the tax base is a significant challenge.
Long-Term Strategy
The success of this policy requires striking the right balance between supporting the goal of encouraging wealth accumulation among Canadians with the social and economic need to fund government services and support broad-based economic prosperity.
I am not convinced that this is a good policy. TFSA contribution limits go up regularly with inflation. I like this approach as the limit stays within the means of more Canadians. Instead of adding this top-up, given the lower contribution amounts among Canadians with fewer financial resources, perhaps governments would do better to provide additional incentives for lower-income Canadians to invest in TFSAs.
As for boosting investment in Canadian businesses, perhaps programs within the Business Development Bank of Canada (BDC) could be expanded or additional deductions or credits could be made available to investors or businesses that invest in new business ventures that necessarily come with a greater risk of failure. At the very least, policies that affect investment at the institutional level would not have an impact on the portfolio decisions that could distort diversification or unnecessarily increase home bias.
This is the 285th blog post for Russ Writes, first published on 2025-04-14.
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Disclaimer: This blog post is intended for general information and discussion purposes only. It should not be relied upon for investment, insurance, tax, or legal decisions.