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Tax-free savings account

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Bowman & Partners Assante Capital Management Ltd. (Member CIPF) Tax-Free Savings Accounts A New Way to Invest
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Page 1: Tax-free savings account

Bowman & PartnersAssante Capital Management Ltd.

(Member CIPF)

Tax-Free Savings AccountsA New Way to Invest

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© Bowman & Partners

Tax Planning Strategies

• Preferred Taxes– Dividends, capital gains

• Deferred Taxes– RRSP, corporate class funds

• No Taxes– Inheritance, Tax-Free Savings Account

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© Bowman & Partners

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

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© Bowman & Partners

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

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• 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

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• It is a TAX-FREE savings account– Contributions are not tax-deductible

However

– Investment income is not taxed

– Withdrawals are not taxed

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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.

TFSA vs. Non-registered AccountIn a TFSA, investment income is not taxed

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TFSA vs. RRSPWith a TFSA, withdrawals are not taxed

TFSA RRSP

Funds to invest 2,000 2,000

Tax (40% rate) (800) 0

Net contribution 1,200 2,000

In 20 yrs @ 5.5% 3,502 5,836

Tax (40% rate) 0 (2,334)

Net proceeds 3,502 3,502

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Who is eligible for a TFSA?

• Individuals

• Canadian residents

• 18 years of age

(no upper limit)

• No income requirement

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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

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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:

2009 2010 2011 2012

Indexed amount $5,000 $5,100 $5,202 $5,306

Contribution room $5,000 $5,000 $5,000 $5,500

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Contribution room

0

1000

2000

3000

4000

5000

Limit is$5000

You invest$2000

Unusedroom

Annual contribution room

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• Unused contribution room can be carried forward to future years

• Amount of available TFSA room will be reported on Notice of Assessment

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• 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

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Excess contributions

If you contribute more than your room allows …

The penalty is 1% per month on the excess contribution

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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

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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

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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

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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

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• 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

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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

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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

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TFSA or …?

• TFSA or RRSP?

• TFSA or Home Buyers Plan?

• TFSA or Lifelong Learning Plan?

• TFSA or Reg. Education Savings Plan?

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Factors to consider

• Purpose of the investment

• Investor behavior

• RRSP room

• Tax rate at withdrawal (including effect of claw-backs)

• Type of investment

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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

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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.


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