Tax-free savings account

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  • RRSPs were first introduced in 1957.
  • Many people confuse an account with the investment in the account.
  • We wish it was called an “investment” account
  • Capital gains and other investment income earned in a TFSA are not taxed. So, if you contributed $200 a month for 20 years to a TFSA instead of a non-registered account, you would enjoy a total tax savings of $11,045 (see assumptions on slide).
  • For this illustration, we’ve assumed tax rate remains the same at contribution and withdrawal.
  • RRSP comparison: No lower age limit when you can start adding to your RRSP contribution room, but must be converted to a RRIF or closed by age 71. RRSP contribution room based on earnings.
  • It is not known how the IRS will treat the income from a TFSA Compare to RRSP: - IRS recognizes RRSP as a tax shelter under current tax treaty
  • If you have more than one TFSA, remember that it is NOT $5000 per account but $5000 total from all the accounts. Indexed to Consumer Price Index Compare to RRSP: - Annual contribution room is 18% of earned income, up to max. contribution of $20,000 in 2008, $21,000 in 2009, $22,000 in 2010 and then indexed after that.
  • The annual contribution room automatically accumulates each year. Contribution room is NOT per account. So if you have more than one account, the total room you have in all your accounts combined is $5000
  • CRA: “ You cannot contribute more than your TFSA contribution room in a given year, even if you make withdrawals from the account during the year.” You must file a tax return to establish your contribution room.
  • Next year’s additional room (ignoring indexing) will be $5000 + $7000 = $12000 CRA: “ Withdrawals, excluding qualifying transfers, made from your TFSA in the year will be added back to your TFSA contribution room at the beginning of the following year .” Compare to RRSP: Once a contribution is made to an RRSP, that contribution room is used up. Withdrawals from TFSA do not result in lost contribution room.
  • Compare to RRSP: You can over-contribute up to $2000 to an RRSP; after that the penalty is 1% per month.
  • Non-qualified investments include real estate, shares of private corporations, LPs, commodity futures, listed personal property (art, stamps, etc.)
  • Compare to RRSP: - There are major tax implications if you use an RRSP as collateral.
  • Amounts withdrawn are added back to your contribution room in the following year. Compare to RRSP: - Withdrawals are considered taxable income and affect income-tested benefits and credits.
  • NOTE: Until provincial legislation recognizes the beneficiary designation on TFSA applications, it may be necessary to designate your spouse as the “successor holder” in your will. TFSA loses its tax-exempt status after death unless it is rolled over to a spouse or common-law partner: CRA: “ When the holder of a deposit or an annuity contract under a TFSA dies, the holder is considered to have received, immediately before death, an amount equal to the fair market value (FMV) of all the property held in the TFSA at the time of death. After the holder's death, the annuity contract is considered to be a separate contract and is no longer considered as a TFSA. All earnings that accrue after the holder's death will be taxable to the beneficiaries.”
  • CRA: “When no spouse or common-law partner is named in the TFSA contract, the deceased holder's estate becomes entitled to receive the TFSA property. If the deceased's will states that the spouse or common-law partner is entitled to the amounts paid under the TFSA, or that the spouse or common-law partner is the sole beneficiary of the estate, the spouse or common-law partner becomes the survivor . Under proposed changes, the TFSA is deemed to continue to be a TFSA until the end of the exempt period , which is the end of the calendar year following the year in which the holder dies, or when the TFSA is paid out, if earlier. All income earned during the exempt period and paid to the beneficiaries, including a survivor, will be included in their income, while earnings that accrued before death would remain exempt. The survivor may contribute payments made within the exempt period to them from a deceased holder's TFSA into their own TFSA without affecting their unused TFSA contribution room limit. Such survivor payments become an exempt contribution . In order for the survivor to designate an exempt contribution, the survivor must designate their survivor payments as an exempt contribution on Form RC240 within 30 days after the day on which the contribution is made.
  • CRA: “ When there is a breakdown in marriage or common-law partnership, an amount can be transferred directly from one former spouse or common-law partner's TFSA to the other's TFSA in the following situation: You and your current or former spouse or current or former common-law partner are living separate and apart at the time of the transfer and you are entitled to receive the amount: - under a decree, order, or judgment of a court, or under a written separation agreement; and -to settle rights arising out of your relationship on or after the breakdown of your relationship.
  • In each of these cases, the current amount of TFSA room is too little to matter. But down the road… TFSA or RRSP: Depends on tax rates when you contribute and withdraw from the plan. A TFSA tends to make more sense if your tax rate (including the effect of RRSP withdrawals on income-tested benefits) will be higher on withdrawal than it was when you contributed. In most cases, a combination of the two is best TFSA or HBP: No penalties if you don’t pay back the funds to the TFSA and withdrawals from TFSA automatically create new contribution room TFSA or LLP: Same as HBP TFSA or RESP: TFSA loses out on CES Grant, but there is no penalty if the child doesn’t go to university/college
  • Some talking-points: Easy to take money out of a TFSA Build RRSP when income is low for later years when income will be higher If tax rate at withdrawal is lower than at contribution than RRSP is better choice RRSP “melt down” strategy where taxes will be higher at death than during life. Shelter interest-bearing investments Possibly shelter dividend paying investments if gross up will inflate income and affect claw-backs

Transcript

  • 1. Bowman & Partners Assante Capital Management Ltd. (Member CIPF) Tax-Free Savings Accounts A New Way to Invest
  • 2. Tax Planning Strategies
    • Preferred Taxes
      • Dividends, capital gains
    • Deferred Taxes
      • RRSP, corporate class funds
    • No Taxes
      • Inheritance, Tax-Free Savings Account
  • 3. What’s a Tax-Free Savings Account?
    • “ It’s the single most important personal savings vehicle since the introduction of the Registered Retirement Savings Plan. ”
    • - Dept. of Finance Canada,
    • Budget 2008
  • 4. Basic features of a TFSA
    • It is a registered ACCOUNT
      • A “vehicle” for your investments
      • Can hold:
          • Mutual funds and managed portfolios
          • GICs and high-interest savings
          • Stocks and bonds
          • Any investment that can be held in a RRSP
  • 5.
    • It is a “ SAVINGS ” account
      • Not a bank savings account
      • An investment account for all your financial plans
          • Short-term goals
          • Long-term goals
          • Anything else in between
  • 6.
    • It is a TAX-FREE savings account
      • Contributions are not tax-deductible
      • However
      • Investment income is not taxed
      • Withdrawals are not taxed
  • 7. TFSA vs. Non-registered Account In a TFSA, investment income is not taxed Assumes a $200 monthly contribution for 20 years, a 5.5% rate of return and an average tax rate of 21%. Source: Government of Canada, 2008 budget.
  • 8. TFSA vs. RRSP With a TFSA, withdrawals are not taxed 3,502 3,502 Net proceeds (2,334) 0 Tax (40% rate) 5,836 3,502 In 20 yrs @ 5.5% 2,000 1,200 Net contribution 0 (800) Tax (40% rate) 2,000 2,000 Funds to invest RRSP TFSA
  • 9. Who is eligible for a TFSA?
    • Individuals
    • Canadian residents
    • 18 years of age
    • (no upper limit)
    • No income requirement
  • 10. Moving out of country
    • If you cease to be a Canadian resident …
    • Can continue to hold your TFSA
    • Cannot add to it
    • Still have tax-free
    • benefits (Canada only)
    • Contribution room
    • does not grow
  • 11. How much can you contribute?
    • Initially up to $5000 per year
    • Annual amount will be indexed and rounded to the nearest $500
    • For example, with a 2% inflation rate:
    $5,500 $5,000 $5,000 $5,000 Contribution room $5,306 $5,202 $5,100 $5,000 Indexed amount 2012 2011 2010 2009
  • 12. Contribution room Annual contribution room
  • 13.
    • Unused contribution room can be carried forward to future years
    • Amount of available TFSA room will be reported on Notice of Assessment
  • 14.
    • Amounts withdrawn are added back to contribution room in the following year
    • For example:
      • You invest $5,000 in a TFSA
      • It grows to $7,000
      • You withdraw $7,000 for a cruise
      • Next year, your room will increase by $12,000*
      • * Assumes annual contribution room of $5000
  • 15. Excess contributions
    • If you contribute more than your room allows …
    • The penalty is 1% per month on the excess contribution
  • 16. Transfer-in-kind
    • A TFSA can hold the same investments as an RRSP
    • Transferring an asset is a deemed disposition – you have to report a capital gain (but cannot report a capital loss)
    Mutual funds Stocks Bonds Segregated funds GICs High-interest savings
  • 17. TFSA and Loans
    • Interest on loans used to invest in a TFSA are not tax-deductible
    • A TFSA can be used as collateral for loans
    • *Before borrowing to invest you should always know the risks of leveraged buying
  • 18. What about withdrawals?
    • All tax-free
    • Does not affect income-tested benefits (such as OAS, GIS, CCTB) or credits (such as GST credit)
    • Does not result in lost contribution room
  • 19. Estates
    • If the sole beneficiary* of the TFSA is your spouse or common-law partner …
      • Transfer with no tax consequences
      • Does not affect survivor’s contribution room
    • Otherwise, investment income earned after death is taxable to beneficiary
    • * Designated as the successor holder
  • 20.
    • If there is no successor holder, a surviving spouse or common-law partner may be entitled to an exempt contribution
    • Until provisions are made in provincial legislation, TFSA assets will pass to beneficiaries by way of a will
  • 21. Separation and divorce
    • May be able to transfer directly from one former partner's TFSA to the other's TFSA
    • Neither person’s contribution room is affected
  • 22. Why invest in a TFSA?
    • To supplement your RRSP
    • To tax-shelter non-registered money
    • To enhance the flexibility of your investment plan
    • To provide a tax-advantaged disposition of your estate
  • 23. TFSA or …?
    • TFSA or RRSP?
    • TFSA or Home Buyers Plan?
    • TFSA or Lifelong Learning Plan?
    • TFSA or Reg. Education Savings Plan?
  • 24. Factors to consider
    • Purpose of the investment
    • Investor behavior
    • RRSP room
    • Tax rate at withdrawal (including effect of claw-backs)
    • Type of investment
  • 25. What can we do for you?
    • Expertise : Stay up-to-date on TFSA rules and strategies
    • Efficiency : Coordinate tax-advantaged use of different accounts
    • Emotions : Offer a second opinion before withdrawal of funds
  • 26.
    • This material is provided for general information and is subject to change without notice. Every effort has been made to compile this material from reliable sources however no warranty can be made as to its accuracy or completeness. Before acting on any of the above, please make sure to see a financial advisor for individual financial advice based on your personal circumstances.
    • Services and products may be provided by an Assante Advisor or through affiliated or non-affiliated third parties. 
    • Leveraging carries its own risks and is not for everyone.  Talk to your advisor for advice on properly managing those risks.