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TFSA Strategies

Peter Zloty - Jan 20, 2017

The Tax-Free Savings Account (TFSA) has become a significant retirement savings vehicle. As of January 1, 2017, TFSA total  contribution room now stands at $52,000. That means if you were an eligible Canadian who was at least 18 years of age in 2009 (at the TFSA inception), and you have not contributed to a TFSA previously, you will now have a total of $52,000 in TFSA contribution room available. The TFSA continues to be one of the most flexible and compelling savings vehicles available to Canadians. Here are some things that you may not have considered when it comes to the TFSA:

A Great Way to Split Income. The TFSA can be a great way to split income with a spouse (or common-law partner) or with children over the age of 18. Often, attribution rules under the Income Tax Act do not permit income-splitting between spouses or common-law partners, and any income or capital gains are attributed back to the original spouse/common-law partner. The TFSA provides an exception to this rule. If the higher income-earner in a couple gifts funds to a spouse or common-law partner who then contributes such funds to a TFSA, there is no attribution on the income/gain earned in the TFSA. This could result in a sizable tax-savings opportunity over the years. Note that the exemption to the attribution rules no longer applies when transferred funds or property is withdrawn from the TFSA (i.e., any future income/capital gains earned on withdrawn funds or securities would be attributed back to the individual who was the original source of the funds). Money for a TFSA can also be gifted to children who are 18 years of age or older.

Pass on Wealth Tax Efficiently. There will not be tax arising on TFSA investment growth upon the holder’s death. If a successor annuitant or beneficiary is named in the TFSA these assets will also bypass the will, thus avoiding the application of a probate tax in provinces where this is applicable. When leaving the TFSA to a spouse or common-law partner, it is generally preferable to name them as the plan’s “successor holder” (and not the beneficiary), so as to avoid being taxed on any income or gains arising after the holder’s death (except in Quebec). The TFSA will transfer to the spouse or common-law partner who has the choice of either continuing to operate it tax-free or closing the account. If a spouse or common-law partner is named as the beneficiary, taxes would be due on any gains made or income earned between the time of the holder’s death and the closing of the account.

Beware of Transfers In! If transferring investments “in-kind” to a TFSA, you are considered to have disposed of the investment for its fair market value at the time of the transfer. If there is a capital gain, you will be taxed on the gain. However, if there is a loss, a capital loss will be denied.

Leaving Canada? Keep Your TFSA. More and more Canadians are working or retiring abroad. If you become resident of another country, you can continue to hold the TFSA and the income and gains will not attract Canadian tax. However, no new contributions should be made as they will result in penalty taxes. As well, depending on the tax rules of the country in which you are now resident, that country may not recognize the tax-free status of the Canadian TFSA.