Whenever a good idea comes along that will actually benefit the people, somebody has to go and screw it up. The newly-introduced Tax-Free Savings Account here in Canada is no exception. BMO and TD, two of our largest banks, have both announced a $50 annual administration fee for having these accounts, in addition setup fees, withdrawl fees, transfer fees, etc.

So basically, if you open one of these accounts and put $5,000 in (the maximum limit per year), and then put the money into a 1-year GIC @ 1.20% (or a government bond,) you will make...

$5,000 x 0.012 = $60
BUT WAIT, Remember -$50 for the account fee.
Leaving you with a whopping $10 of interest. A whopping 0.20% return! (yes I wrote that correctly.)

Or you can just invest in the same GIC outside of a TFSA, and pay the tax on the interest income.
$5,000 x 0.012 = $60/ 1.33 = $45.11. Still a mere 0.90% after-tax return, but it's still the closest you can get to risk-free, and 5 times better than a TFSA. If you invested in stocks, the benefit of NOT using a TFSA is even greater amplified, as only 50% of capital gains are currently taxable in Canada.

I guess you can't blame them for "banking" on the fact that most people won't do the math!

The bank doesn't have to make up the tax, the accounts are just exempt altogether. Just like lottery winnings aren't taxable. In the same way there are exempt or zero-rated goods like basic groceries (vegetables, etc.) I guess the effect would be the same as if the banks gave a higher interest rate and you paid tax on it, yes. I don't know why the government is giving up that tax money... partially because they can't force the banks to create a new "super interest account" with a multiplier that automatically takes your gains and boosts them up another 1% for no reason, and partially because they might not be sure if the national pension fund will be so healthy after the baby boom generation gets done with it, and wants to encourage Canadians to save more for retirement on their own.

It's supposed to be an alternative to an RRSP, except that an RRSP just defers the tax until you withdraw the money, whereas a TFSA there isn't any at all. I don't know if there is a misconception that a TFSA is just a special savings account, but it's basically like the RRSP in another way, that you have freedom to move the money into different financial instruments (GICs, bonds, stocks, mutual funds, whatever) within the account.

Once you had a substantial amount of money invested in a TFSA, $25,000 - $100,000+, and you were making more like 4-5% a year, then it would obviously be a bit more appealing.

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Government savings bonds and GICs are fixed-term deposits, they usually come in 1, 2 or 5 year. Maybe 10 year too.
So you can make a fixed-term deposit inside or outside of your TFSA