CIBC World Markets is predicting that Canadians will contribute about $20 billion to the new Tax-Free Savings Account (TFSA) plan in 2009, and that the market will rise to $115 billion by 2013.

In a new report, CIBC declares that the TFSA, “will revolutionize the tax treatment regarding investments held by Canadians.” It says that, based on recent surveys and the experience of other countries with similar plans, “Canadians will use the TFSA much faster than currently projected.”

“Within a short five-year span, we expect the TFSA market to mushroom to a $115 billion market with a cumulative tax savings of close to $2 billion,” it forecasts.

The firm explains that the decision to between TFSAs and RRSPs is simple. “If retirement income is projected to be lower than current income, then RRSP is clearly the right choice. If retirement income is likely to be similar to current income, then the TFSA and the RRSP are equivalent. But, if one expects retirement income to surpass current income, then TFSA contributions should replace RRSP contributions,” it says.

“So, the TFSA vs. RRSP analysis suggests that roughly 400,000 low-income Canadians who currently contribute to an RRSP will potentially switch to a TFSA. This would amount to roughly $2.5 billion in cumulative TFSA contributions over the next five years coming from this segment of the population,” it estimates.

The report notes that while the federal budget assumed that the account will appeal primarily to low-income Canadians, the experience in countries such as the United Kingdom suggests that many others will use it, too.

“The magic behind the TFSA is in its versatility. It is not simply a tax measure designed to help low-income Canadians, but rather a vehicle that can fit almost every Canadian, regardless of income or stage in life,” CIBC WM says. The TFSA offers an additional savings device for seniors beyond the current cut-off age for making RRSP contributions. It ads contribution room for those whose RRSPs are maxed out. And, for the nearly 40% of workers who are covered by a registered pension plan, the TFSA “provides a way to compensate for the pension adjustment that limits RRSP contributions.”

“Equally important is the fact that the TFSA’s flexibility makes it ideal for immediate needs such as emergency funds as well as a tax efficient way for Canadians to finance consumption,” CIBC WM adds. “This liquidity feature of the TFSA plan is of great importance as it will probably work to limit or even eliminate uneconomical behaviour such as RRSP withdrawal.”

With all of these features going for it, CIBC expect the account to be a big hit with Canadian taxpayers.

IE