Wealth Planning With The TFSA

Planning begins with maximizing the contribution to the TFSA and then having the money available to do so. Consider the potential of making a contribution into the TFSA for each individual:

1. $5,000 invested at the beginning of each year for a productive lifetime of 45 year (age 20 to 65) is $225,000. Assume a marginal tax rate of 30% for these examples.
2. Add a compounding rate of return of 5% to this invested inside a tax sheltered plan and that TFSA investment will grow to $838,426 inside the plan. (If invested outside the TFSA the amount would be only $547,420)
3. At a 3% interest rate, the savings would be $477,507 inside the TFSA, and only $376,253 outside of it. At a rate of 3.5% the TFSA savings would be $547,420 and the non-registered value would be $412,294.

TFSA RULES IN PLANNING:

1. Age limitation. Contributions can be made by/for those who have attained 18 years of age and are residents of Canada. There is no upper age limitation.
2. Earned income limitation. There is no earned income limitation.
3. Contribution Deductibility: Contributions to the account are not deductible
4. Earnings accumulate on a tax free basis.óincluding interest, dividends and capital gains.
5. Contribution room. Every TFSA holder can contribute a maximum of $5,000 per year, and this amount will be indexed after 2009, with rounding to the nearest $500. Withdrawals (distributions) will create new TFSA contribution room.
6. Carry Forward Room. Unused contribution room can be carried forward on an indefinite carry forward basis. You can take money out, in other words, spend it on whatever you want, and then put it back in when you can because the TFSA contribution room has been preserved.
7. Excess Contributions. Such contributions are subject to a 1% per month penalty until the amounts are removed.
8. Withdrawals (distributions) of both earnings and principal are tax exempt.
9. Purpose: Recipients can take the money out for what ever purpose they wish and create new TFSA contribution room; which means they can put it back in a future year to grow when the withdrawal need is met and new savings are achieved. This will be welcome news to grandparents in particular.
10. Income Testing Not Affected. Income-tested tax preferences like Child Tax Benefits, Employment Insurance Benefits or Old Age Security pension are not affected by earnings or withdrawals.
11. Attribution Rules. There is no attribution rule attached to the TFSA, allowing parents and grandparents to transfer $5,000 per year to each adult child in the familyófor the rest of their lives. In addition, one spouse may transfer property to the TFSA of the other spouse without incurring attribution. Have grandparents, aunts, uncles gift into the TFSA, which they can also do without attribution
12. TFSA Eligible Investments. The same eligible investments as allowed within an RRSP will apply to the TFSA. The account holder must deal at arm's length with the asset issuer - so, you can't invest in shares in a corporation you control, for example.
13. Interest Deductibility. Interest paid on money borrowed to invest in the TFSA is not deductible.
14. Stop Loss Rules. A capital loss is denied when assets are disposed to a trust governed by an RRSP or RRIF. The same rule apply to investments disposed to a TFSA.
15. Departure Tax. The TFSA is not caught by the departure tax rules. In fact, a beneficiary under a TFSA who immigrates to or emigrates from Canada will not be treated as having disposed of their rights under a TFSA. No TSFA contribution room is earned for those years where a person is non-resident and any withdrawals while non-resident cannot be replaced. The US does not recognize the TFSA therefore any realized income ought to be non-taxable when removed after emigration. Capital appreciation will be taxable.
16. Marriage Breakdown. Upon breakdown of a marriage or common-law partnership, the funds from one party's TFSA may be transferred tax-free to the other party's TFSA. This will have no effect on the contribution room of either of the parties.
17. Death of a TFSA Holder. When the TFSA holder dies, the funds within the account may be rolled over into their spouse's TFSA or they may be withdrawn tax-free. Any amounts earned within a TSFA after the death of the taxpayer are taxable to the estate.