TFSA – Tax Free Savings Account
Beginning January 1st, 2009, the new Tax Free Savings Account began being available to Canadians aged 18 years and older. TFSA contributions grow tax-free and can be withdrawn without any tax implications whatsoever. The TFSA makes an excellent complement to RRSPs and a wonderful addition to registered savings plans as a whole. We can synergistically integrate the TFSA into a sound financial plan for optimal performance. Speak to a CWF Advisor today!
TFSA can benefit anyone.
How TFSA works
- Canadian residents age 18 and over can save up to $5,000 a year in a TFSA
- Contributions are not tax deductible, but investment returns (capital gains, interest and dividends) earned in a TFSA are not taxed, even when withdrawn
- Withdrawals are tax free and funds can be used for any purpose
- Unused contribution room can be carried forward to future years. As well, any amount withdrawn from a TFSA can be re-contributed in a future year without requiring new contribution room
- Neither income earned in a TFSA nor withdrawals will affect eligibility for federal tax credits or income-tested benefits such as the Canada Child Tax Benefit, Old Age Security (OAS) or the Guaranteed Income Supplement (GIS)
- Investments eligible for an RRSP can generally be held in a TFSA
Is it better to contribute to a TFSA or an RRSP?
TFSA and RRSP have different features and benefits, as they are designed to complement each other. RRSP is primarily intended for retirement while the TFSA is for everything else in your life.
Generally speaking, whether it is better to contribute to a TFSA or an RRSP depends on two variables – your tax rate when you contribute funds and your tax rate when you withdraw funds. If you expect to be in a lower tax bracket when funds are withdrawn, an RRSP is probably a better investment. If you expect to be in a higher tax bracket when money is withdrawn, a TFSA may be the better choice. However, each individual situation is unique and other factors may come into play.
Who does the TFSA benefit?
- Young people just starting out: TFSAs stimulate more savings when starting at a younger age
- Seniors: provides retired people with a means to save on a tax-free basis; neither withdrawals nor income earned in a TFSA will trigger clawbacks of Old Age Security benefits or the Guaranteed Income Supplement
- High income earners: taxpayers who have already made the maximum contribution to their RRSP have another tax-effective savings vehicle
- Lower income earners: taxpayers in a lower tax bracket may prefer to forgo the modest tax deduction of an RRSP in exchange for the tax-free growth and withdrawals of a TFSA
- Anyone saving for a large ticket item: TFSAs can be used to fund a car purchase, vacation or down payment for a house
In other words, just about everyone.
Tip – To pass the TFSA to a spouse or common-law partner, designate them the Successor Holder. Anyone else – designate them a beneficiary.
- TFSA Successor holder – You can only designate a spouse or common-law partner as the successor holder. If you die, ownership of the tax-free savings account will be transferred to the survivor. The survivor gets to keep the tax-free status of the TFSA money without affecting their existing contribution room.
- TFSA Beneficiary – A beneficiary can be any person. If you die, the money will be transferred to the beneficiary. If the beneficiary is not a spouse or common-law partner, the money will be de-registered as of the date of death of the original owner and will not remain tax-sheltered. The money will be transferred to a non-registered account in the name of the beneficiary. Any future capital gains will be calculated using the value of the investments as of the date of death of the original owner.If the beneficiary is a spouse or common-law partner, they are allowed to make an exempt contribution to their own TFSA. The contribution cannot exceed the market value of the TFSA on the date of the original owner’s death. If this applies, the survivor gets to keep the tax-free status of the TFSA money without affecting their existing contribution room. You have to notify the CRA if you are making an exempt contribution as a survivor within 30 days of the transfer. This can be done using Form RC240, Designation of an Exempt Contribution Tax-Free Savings Account (TFSA).
Advantages to naming a successor holder:
- No probate fees
- No tax issues since money is never de-registered.
- Money will remain in a TFSA.
Advantages to naming a beneficiary:
- No probate fees.
- Minimal tax issues if beneficiary is a survivor.
- Money will remain in a TFSA if the beneficiary is a survivor.
Tip – Name a beneficiary, even if you have already named a successor holder. If you and the successor holder die at the same time, the beneficiary will get the money.
Note that if you name both a successor holder and beneficiary on a TFSA, the successor holder will override the beneficiary.
These designations are account specific. You can name different successor holders or beneficiaries to each account. It is up to you to ensure that the correct estate information is assigned to each account.
What happens to the TFSA if I don’t name a successor holder or beneficiary?
If you don’t specify a successor or beneficiary on the tax-free savings account, the money will become part of your estate. Your estate will be handled according to your will or applicable laws. The money in the TFSA can still be willed to a spouse or common-law partner, but probate fees will be applied and the money will no longer be tax-sheltered.
Saving money should be for everyone.
CWF Group lends clarity to these questions and so many more. To find out more click here to speak with one of our specialist.