Help Investors Find an Alternative to CSBs:  Five Reasons Why It’s The TFSA

It was the go-to savings vehicle for generations of Canadians, and a gateway to more sophisticated investing for millions. But with Canada Savings Bonds (CSBs) off the table as of November 1, advisors should guide clients to another option that will occupy the same space in their hearts — and finances. There are five key reasons the TFSA should be an even better choice for Canadian savers.

Introduced in 2009, tax‑free savings accounts (TFSAs) allow those 18 and older to save or invest thousands of dollars a year ($5,500 in 2017), with income earned on those contributions sheltered from tax. The uptake on the program has been swift; nearly six million Canadian households now contribute to TFSAs, according to the latest census data.   Here’s why they are such a good savings vehicle.

Reason #1 - Unlike the CSB, the interest – or any other type of investment income - earned within a TFSA is tax-free.

Reason #2 -  Even aside from the tax-free interest, the TFSA’s appeal is clear: funds can be withdrawn at any time without penalty, and current-year withdrawals increase the next year’s contribution room by an equal amount.

Reason #3 - The cumulative limit for contributions from 2009 to 2017 is $52,000. This will increase by another $5,500 in January 2018 for a cumulative total of $57,500, making the TFSA a great place for unexpected lump sums – a year-end bonus, an inheritance or a severance package, for example.

Reason #4 - While the CSB’s popularity was fueled in part by employers offering staff the ability to contribute through automatic payroll deductions, individuals can easily set up automatic contributions to a TFSA through their financial institution. A contribution of $211.54 for each biweekly pay period works out to a total of $5,500 over the year.

Reason #5 - Many types of investments can be held within a TFSA, including stocks, mutual funds, GICs, bonds — and, until now, CSBs. But for many Canadians, a simple high-interest cash TFSA at a chartered bank could become that first, low-risk savings option that the CSB used to serve.

There are, however, some TFSA penalties that investors and their advisors should be aware of:

• Excess Contributions. When taxpayers make contributions over the allowed maximum, they are subject to a 1 per cent penalty each month until the amounts are removed. If, however, taxpayers are willing to pay the penalty tax to keep the money in the plan, hoping to reap an even higher tax-free return on the excess contribution, 100 per cent of the gains will be subject to tax when deliberate overcontributions occur, after October 16, 2009.
• TFSA Eligible Investments. The same investments allowed within an RRSP are eligible for the TFSA. A special rule prohibits a TFSA from making an investment in any entity with which the account holder does not deal at arm’s length, and for occurrences after October 16, 2009, a 100 per cent penalty tax on the income so earned will apply.
• Swapping for Tax-Free Gains. When taxpayers swap investments from non-registered accounts for cash in the TFSA, and then swap them back out for a revised, higher price point, thereby leaving gains in the TFSA to be tax-free, 100 per cent of the gains are subject to tax, after October 16, 2009.

Additional Educational Resources:

Registered vs Non-Registered Savings Calculator (free trial available).
MFA-Retirement and Estate Services Specialist™ designation program.

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