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Bowman & PartnersAssante Capital Management Ltd.
(Member CIPF)
Tax-Free Savings AccountsA New Way to Invest
© Bowman & Partners
Tax Planning Strategies
• Preferred Taxes– Dividends, capital gains
• Deferred Taxes– RRSP, corporate class funds
• No Taxes– Inheritance, Tax-Free Savings Account
© 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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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
© Bowman & Partners
• 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
© Bowman & Partners
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
© Bowman & Partners
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
© Bowman & Partners
TFSA or …?
• TFSA or RRSP?
• TFSA or Home Buyers Plan?
• TFSA or Lifelong Learning Plan?
• TFSA or Reg. Education Savings Plan?
© Bowman & Partners
Factors to consider
• Purpose of the investment
• Investor behavior
• RRSP room
• Tax rate at withdrawal (including effect of claw-backs)
• Type of investment
© Bowman & Partners
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
© Bowman & Partners
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.