IT'S getting financial planners and accountants across the nation hot and bothered.
They are hailing it as the most
dramatic change to the way we save
since RRSPs were introduced in 1957.
Now, if only it would only arouse as
much enthusiasm
amongst the general
public.
Its name alone
should send shivers
of good vibrations
up your spine, but
maybe you haven't
heard -- or have simply
forgotten about the announcement
in this year's federal budget?
"Tax Free Savings Account --
the name says it all," says James
Kraemer, a certified financial planner
and chartered accountant with TFI
Financial Services in Winnipeg.
"You can accumulate money in there taxfree,
and you don't need to worry about it in the
short term because you can invest it a savings
account -- or interest-bearing account -- that's
liquid. It doesn't have to be a long-term investment."
Beginning in 2009, Canadian citizens, 18
years and older, can invest up to $5,000 a year
in this registered account and grow that money
any way they see fit -- in bonds, GICs, mutuals
or stock -- without having to worry about any
tax consequences at all.
Unlike an RRSP, which allows you to invest
money before taxes for a tax refund, the Tax
Free Savings Account (TFSA) is an after
tax contribution. It's not tax-deductible, but
because you've already paid income tax on the
money invested in the account, it won't count as
income when you withdraw it.
An RRSP may grow tax-free, but when you
withdraw it, it's taxed as income. Penalties also
apply if you withdraw it before retirement (exceptions
are for a home or education).
A TFSA can grow tax-free, can be withdrawn
tax-free, and can be used at any time for any
reason.
"What's neat about it is that if you are unable
to put the $5,000 in, that amount will accumulate
like an RRSP," says Kent Haugen, also a
chartered accountant and certified financial
planner.
If you didn't take advantage of the plan for a
couple of years, for instance, you could invest
$15,000 in the third year.
"Conversely, if you withdraw your contributions,
you can put them back in at a later date
without any consequences," says Haugen, a
partner with Winnipeg-based accounting firm
Haugen Morrish Angers.
This means if you withdraw $2,000, you
can contribute an additional $2,000 later on to
replace it.
While both accountants would recommend to
most clients that they first maximize their contributions
to RRSPs, they advise anyone with
non-registered savings move them into a TFSA.
"The ones that attract the highest interest
are the ones that you want to do first," Kraemer
says.
Interest earned from savings accounts and
bonds, for example, are 100 per cent taxable,
whereas only half of a capital gain (increase in
value of a stock or mutual fund) is taxable.
A bond with five-per-cent interest returns,
when taxed at a marginal income tax rate of
40 per cent, really only has a three-per-cent
return. Figure in the inflation rate -- say about
three per cent -- and you're not even making
money.
In a TFSA, of course, all that interest income
is yours to do with as you please.
Though it may seem like this is yet another
tax break for middle- and upper-tax-bracket
individuals, it also has some advantages for lowincome
earners.
Colin Busby, a policy analyst for the CD
Howe Institute in Toronto says it's a better
retirement savings vehicle for them because,
unlike RRSPs, it does not affect income-tested
benefits.
"Low-income earners are not going to have
much money to save so whatever they do save in
the future for retirement, there's a high chance
(their benefits) will be clawed back," says
Busby, whose organization published a report
in 2001 on the need for a savings plan similar to
the TFSA.
"The GIS (Guaranteed Income Supplement)
is clawed back with RSP withdrawals, so if you
have small amounts of retirement savings and
you withdraw them, you are penalized harshly."
The TFSA would also be beneficial for
families receiving the Canada Child Tax
Benefit -- also income tested -- should
they need to withdraw from it to make a large
purchase like a car or a down payment on a
home.
Then again, a family on a tight budget might
not have the income available to invest in savings
at all, and might this tax break further
erode government revenues and the social programs
they fund? (Think tax cuts and economic
slowdown equal possible deficit.)
At first, it's an unlikely scenario, Busby says,
because it's estimated by the federal government
that tax savings to Canadians will only be
about $5 million in 2008-2009.
"It's really a long-term government revenue
impact," he says, adding it's difficult to predict
what that may be several years from now.
The 2008 federal budget, however, does offer
some hint of how much TFSA will save Canadians
over the long run: $3 billion.
No wonder it gets the accountants and planners
excited. They just need to work on their
clients a bit.
Kraemer says he met the other day with
a man who, like many of his clients, is welleducated,
fervently saving for retirement, but
completely unaware of what may soon become
a basic building block of everyone's investment
strategy.
"He either didn't hear about it or maybe
forgot about it because the announcement was
made so long ago, but it should be at the top of
people's minds at this time of year and certainly
in the new year."
giganticsmile@gmail.com
Quick facts:
Tax Free Savings Account (TFSA): Announced in
the 2008 federal budget, it allows Canadian citizens,
18 years and older, to deposit $5,000 every
year into a registered, tax-free account.
"ö Savings grow tax-free
"ö Savings can be withdrawn anytime without
penalties
"ö Savings can be withdrawn without triggering
taxes
"ö Unused balance accumulates from year to year
"ö Savings can be withdrawn and replaced at a later
date without affecting limit.
Death, taxes and beneficiaries: When you die,
any money accumulated in the account afterwards
becomes taxable. It's important that you appoint
a "successor account holder" while you are alive,
says chartered accountant James Kraemer. This
allows you to roll your account into the beneficiary's
TFSA account so the money continues to
grow tax-free.
Attribution free: If you have more than $5,000
to invest in a year, you can invest the money in
your spouse's account if there's room available.
You could also open accounts for your children if
they are over the age of 18 and deposit money in
their accounts. It doesn't matter where the money
comes from so long as it does not exceed the cap
amount, Kraemer says.
TFSA savings over a non-registered account:
A person contributes $200 a month to a nonregistered
account for 20 years and $200 a month
to a TFSA for 20 years. (The rate of return is 5.5
per cent. Account revenue distribution is 40 per
cent from interest, 30 per cent from dividends and
30 per cent from capital gains. Account holder is a
middle income earner.)
Non-registered:
Contributions -- $48,000
Investment income -- $28,480
Total amount -- $76,480
TFSA:
Contributions -- $48,000
Investment income -- $39,525
Total amount -- $87,525
TFSA tax savings over non-registered account:
$11,045
-- 2008 Federal Budget
PREVIOUS
