The TFSA update

March 1, 2016

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You can open a Tax-Free Savings Account (TFSA) if you are 18 years of age or older and a Canadian resident.

The Tax-Free Savings Account allows you to invest while not being taxed on interest or investment earnings.

Here is a brief snapshot of the Tax-Free Savings Account (TFSA)

  • Unlike a registered retirement savings plan (RRSP), the money you put into your TFSA cannot be deducted from your income on your tax return.
  • Canadian residents, age 18 and older, can contribute annually to a TFSA.
  • The Federal Budget 2015 under Harper had raised the TFSA annual limit to $10,000, but the new Federal government under Trudeau has rolled it back to $5,500 for 2016. You still have the contribution room for 2015 at $10,000 available for 2015, plus any unused contribution (the 2015 amount will not be reverted).

Here are the facts:

  • The new Liberal government announced that they would reduce the contribution amount for TFSA and re-introduce indexing to inflation for the annual limit. However, they also said they would still allow Canadians to keep the full $10,000 of contribution room for 2015, whether they used it or not.
  • Effectively they “grandfathered” the $10,000 TFSA a limit for 2015 meaning that there is no urgency to rush out and get that $10,000 contributed for 2015. That contribution room will carry forward indefinitely.
  • The total contribution amount for January 1st, 2016, for a Canadian who has never contributed to a TFSA would be $46,500 if the individual were 18 or older in 2009 when the TFSA was created.
  • Money taken out of your TFSA is taken out tax-free.
  • You get your contribution room back in the following year. The full amount of withdrawals can be put back into the TFSA in future years.
    • Careful when you re-contribute: Re-contributing in the same year may result in an over-contribution amount which would be subject to a penalty tax.
  • You don’t have to pay any tax on money you take out of your TFSA as you do with an RRSP, so you’re not penalized for short- or long-term saving. This makes the TFSA useful for investors who trade stocks or equity funds frequently.
    • Cautionary Note: Frequent buying and selling in a TFSA for the purpose of profit-taking may alert CRA to unusual tax strategies, which has been suggested lately as a caution.

Retirement Income related to Tax-Free Savings Account (TFSA) Investing

  • Neither income earned within a TFSA nor withdrawals from it affect eligibility for federal income-tested benefits and credits, such as Old Age Security, the Guaranteed Income Supplement, and the Canada Child Tax Benefit.
    • Compare the TFSA to the RRSP: For retirees with low income, every dollar withdrawn from your RRSP or Registered Retirement Income Fund (RRIF) will reduce the Guaranteed Income Supplement (GIS).
    • Similar to the RRSP, after you file your tax return each year, the government will determine your remaining available Tax-Free Savings Account contribution limit for the coming year. Any unused contribution room gets carried over to the following year.
    • You can have more than one Tax-Free Savings Account insofar as you don’t exceed your contribution limit.
    • Those who expect to be taxed at a lower marginal tax rate in retirement may be better to contribute to an RRSP before a TFSA.
    • Most Canadians will spend their employed lives in a higher average tax bracket than they’ll have in retirement. Thus, an RRSP may be the best way for the majority of Canadians to build a retirement nest egg.
    • If the tax rate at the time of withdrawal is expected to be higher than at the time of contribution, your best choice may be the TFSA.
  • The TFSA may also be a good investment if you are a member of a pension plan and have minimal, if any, room to invest in your RRSP due to a high pension adjustment (PA) factor (more generous plans have a higher PA, leaving less room for personal RRSP contributions). You can supplement your retirement savings through the TFSA.
  • The TFSA can improve savings incentives for low- to modest-income individuals because either the income earned in a TFSA nor the future withdrawals from it affect eligibility for federal income-tested benefits and credits, such as the Canada Child Tax Benefit, the GST credit, the Age Credit, Old Age Security and Guaranteed Income Supplement benefits.

More facts

  • The Tax-Free Savings Account allows you to invest while not being taxed on interest or investment earnings.
  • Contributions are not tax-deductible.
  • You can contribute a maximum of $5,500 each year.
  • Unused TFSA contribution room is carried forward and accumulates in future years.
  • Money taken out of your Tax-Free Savings Account is taken out tax-free. You get your contribution room back in the following year.
  • Choose from a wide range of investment options such as mutual funds, Guaranteed Investment Certificates (GICs) and bonds.
  • The full amount of withdrawals can be put back into the TFSA in future years. Re-contributing in the same year may result in an over-contribution amount which would be subject to a penalty tax.
  • You don’t have to pay any tax on money you take out of your Tax-Free Savings Account, whereas you do with an RRSP.
  • TFSA withdrawals don’t affect your ability to qualify for Federal benefits – so you’re not penalized for saving.
  • Similar to an RRSP, after you file your tax return each year, the government will determine your remaining available Tax-Free Savings Account contribution limit for the coming year. Any unused contribution room gets carried over to the following year.
  • You can have more than one Tax-Free Savings Account so far as you don’t exceed your contribution limit.
  • Funds can be given to a spouse or common-law partner for them to invest in their TFSA.
  • TFSA assets can generally be transferred to a spouse or common-law partner upon death.

 

 

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