Hi Everyone

I get a lot of information sent to me about great new ideas and products, here is the latest new government incentive to help Canadians save tax free.  Now the dilemma starts—do I contribute to this TFSA or my RRSP?  In a perfect world, the simple answer would be yes, but barring a large lottery winnings, most of us will have to decide according to our cash flow, age, tax bracket, present retirement savings, and a host of other factors. Keep in mind that it will be another year at least until this is actually available to the public. Similar efforts for a Registered Disability Savings Plan were announced in 2007 and we still are in the admin stage !!

Tax Free Savings Account

On February 26, 2008, the Federal government announced its plan to introduce a Tax Free Savings Account (TFSA) for Canadians, starting in 2009. A TFSA is a flexible registered savings plan that will improve savings and assist nearly all Canadians with their different savings needs throughout their lifetime.
Similar to a Registered Retirement Savings Plan (RRSP), every Canadian over the age of 18 will build contribution room. In the case of a TFSA, contribution room of $5,000 (inflation-adjusted annually) will automatically accumulate each year. Any unused contribution room will be carried forward indefinitely to future years. However unlike an RRSP, any amount withdrawn from the TFSA will be added to the individual’s contribution room, so contribution room is never lost but may be re-contributed in a future year. With a TFSA, Canadians have an effective way to access savings in case of unexpected circumstances, and these savings may be replenished in the future.

For example, Tommy is 25 years old and contributes $4,000 in 2009 to a TFSA and withdraws $1,000 from his plan in 2010. Tommy’s contribution room in 2010 will be $7,000 ($1,000 carried forward from 2009 + $5,000 contribution room for 2010 + $1,000 from the 2010 withdrawal).

The key element of a TFSA is that while contributions are not tax deductible, any investment earnings (interest, dividends, capital gains) and withdrawals from the plan are exempt from taxation. Therefore, investments will compound and not be held back by tax.

An added benefit of the TFSA is that investment earnings and withdrawals will not be reported on the personal tax return, thus eliminating the possibility of clawback of income-tested benefits, such as Old Age Security.
Qualified investments are generally the same as those for RRSPs, which include, among other investments, (segregated funds), mutual fund trusts and classes of shares of a mutual fund corporation. Mackenzie Destination+ Funds are an attractive investment option for TFSAs because of their daily lock-in of investment gains, automatic asset allocation and guaranteed maturity amount for your desired investment savings target. Professional advice will be critical in helping Canadians use the TFSA to its best advantage.

The TFSA has very broad applications, benefiting income earners at all levels. Whether saving for a dream vacation, a down payment for a home, children’s education or retirement, the tax-exempt status on investment income and withdrawals will help achieve any financial goal much sooner. Seniors will be able to save and still collect Old Age Security. Individuals just starting a career can use the TFSA and build RRSP contribution room to use in later years when they earn more. Young couples can save for the education of their children; affluent individuals can set aside funds as part of their estate plans. There are numerous variations, so you could sum up the target market simply: Canadians 18 years and older.

The TFSA is a great plan to hold investments that are taxed unfavourably outside of a registered plan – such as interest income. The TFSA can hold interest-bearing securities, such as GICs, money market mutual funds, (segregated funds), term deposits, or strip bonds – and shelter the interest income from tax. Dividend and capital gains will also be sheltered, and for investors with a medium-to-long-term time frame, can be a tremendous way to build wealth.

It’s hard to see the downside. The benefits of the TFSA create new opportunities and flexibility in financial planning for Canadians.

Article written by Sandy Cardy, Senior Vice-President of Tax and Estate Planning for Mackenzie Financial. If you have specific questions related to tax or estate planning, please feel free to send your questions to taxandestate@mackenziefinancial.com. They typically respond to questions by email within 48 hours.
IDC

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