ARTICLES  &  REVIEWS

Tax-Free Money for You
London Free Press

Canadians need to save for many different purposes over their lifetimes. Reducing taxes can play a big role in helping you achieve your objectives. In 2009, the Government introduced the new Tax-Free Savings Account (TFSA). It has been considered as ‘the single most important personal savings vehicle since the introduction of the Registered Retirement Savings Plan (RRSP).’  The more we begin to understand some of the current and somewhat hidden features, you may agree. The TFSA will allow Canadians to set money aside in many eligible investments and watch those investments grow tax-free throughout their lifetime. TFSA savings can be used for short-term or long-term plans such as retirement planning or a tax-free receipt to your estate. Perhaps the TFSA could have been called the Tax-Free Investment Account because it can hold all investments that qualify for an RSP, like mutual funds, pooled funds, stocks and bonds, GIC’s, and cash savings.

How the TFSA Works

• Starting in 2009, Canadians aged 18 and older, who file tax returns, can save up to $5,000 every year in a TFSA.
• Contributions to a TFSA will not be deductible for income tax purposes. Investment income including capital gains earned in a TFSA, grow tax-free, and withdrawals are tax-free.
• Unused TFSA contribution room can be carried forward to future years.
• You can withdraw funds from the TFSA tax-free at any time for any purpose.
• The amount withdrawn can be put back in the TFSA in the following future years without reducing your contribution room. This can provide a large tax shelter building over the years which will never be lost.
• Neither income earned in a TFSA nor withdrawals will affect your eligibility for federal income-tested benefits and credits.
• Contributions to a spouse’s TFSA will be allowed and TFSA assets can be transferred tax-free to a spouse upon death with appropriate beneficiary designations.
• Income splitting attribution rules do not apply, as this would allow a higher-income spouse to move investments to a lower-income spouse.
• Now that we are in 2010, your TFSA contribution room is $10,000, if you have not started to contribute in 2009. 

How Is a TFSA Different From a Registered Retirement Savings Plan?

An RRSP is primarily intended for retirement. The TFSA is like an RRSP for everything else in your life, including retirement.

Both plans offer tax advantages, but they have key differences:

• Contributions to an RRSP are deductible and reduce your income for tax purposes. In contrast, your TFSA savings will not be deductible.
• Withdrawals from an RRSP are added to your income and taxed at current rates. Your TFSA withdrawals and growth within your account will be tax-free and contribution room is not lost.

For example Bill and Jane have contributed $5000.00 each from 2009 to 2014. They have 60,000 invested, plus $14,000 in earnings, assuming 6% return over that period, for a total of $74,000. Bill and Jane can remove that $74,000.00 tax-free, and they still have tax-free contribution room available to them in the future of $74,000.00. Unlike an RSP, their contribution is not lost when funds are withdrawn.

Benefits for Seniors

The TFSA will also provide seniors with a tax-free savings vehicle to meet ongoing savings needs, something they have only limited access to once they reach age 71 as they are required to begin drawing down their registered retirement savings. There is no age restriction for contributing to a TFSA.

Designating a beneficiary to your Tax-Free Savings Account (TFSA)

The law in the Province of Ontario allows you to designate a beneficiary to your TFSA in the event of your death, by means of a separate designation outside of your will. The TFSA would not be a part of your Probated Estate avoiding provincial probate fees, and making the transfer much less complicated.

Much like an RRSP, the TFSA should be a part of your financial portfolio. Although $5,000 is a modest amount, the $5,000 annual increase and the tax-free compounding, tax-free withdrawal and tax-free transfer of your investments may result in significant tax savings.