Minister for Finance Simon Harris is weighing options for a new savings and investment scheme, with two foreign models standing out: Canada’s Tax-Free Savings Account (TFSA) and Sweden’s Investeringssparkonto (ISK).
With a TFSA, Canadians can invest up to $7,000 Canadian dollars (€4,339) a year, carry forward unused allowances and watch gains and withdrawals stay completely tax-free. While the £20,000 (€22,844) annual limit on the UK’s Individual Savings Account (ISA) is surely far too generous to emulate here, Canada’s TFSA is a flexible, attractive option, letting investments snowball through tax-free compounding.
Sweden’s ISK takes a different approach. Like Canada, there’s no capital gains tax on disposal. Unlike Canada, there’s no annual cap on contributions, but savers pay a small yearly tax – usually about 1 per cent – on the account’s value, with the first €28,000 effectively tax-free. The system is simple, automatic and predictable.
Both models are popular. For most investors, Canada’s system is clearly more generous, letting you hold stocks for decades without the state touching your gains. The ISK, by contrast, trims returns each year, including in weak market years.
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However, Harris may be tempted to go for a Swedish-type system. There are three reasons for this.
One, it offers a steady annual tax take and may be more politically defensible, avoiding large untaxed pools of savings.
Two, Sweden’s annual tax reduces the temptation to divert pension savings into a tax-free wrapper. Note that in 2023, more savers contributed to TFSAs, and in larger amounts, than to RRSPs, Canada’s main pension vehicle. Pension-substitution risk is real, with even modestly generous tax-free accounts potentially pulling contributions from retirement savings.
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Three, the TFSA is a popular tax vehicle, but not necessarily a driver of the deep stock market culture that European policymakers want to foster, with roughly four in 10 Canadians using it mainly or exclusively for cash.
In contrast, Sweden’s annual charge makes the ISK unattractive for deposits and nudges savers toward stocks. Irish investors would love a tax-free wrapper, but one can see why the ISK is being studied as a blueprint across Europe. Nudging savers into stocks while steadily funding the State, it looks like a rare win for both investors and policymakers.
