How the TFSA cheats Benjamin Franklin?

09 April 2018 by National Bank
 Benjamin Franklin statue

Benjamin Franklin once wrote that “in this world nothing can be said to be certain, except death and taxes.” We will leave to geneticists the burden of refuting the first part of this assertion and will only serve you here arguments which contradict the second.

Apart from exile to a tax haven, Canadian residents can resort to several perfectly legal strategies in order to grow their assets sheltered from taxes. Among them, the Tax-Free Savings Account (TFSA) proves to be without a doubt the easiest one for mere mortals to use.

For whom is the TFSA intended?

Your pension adjustment amount prevents you from making a significant RRSP contribution? Your low marginal tax rate reduces the appeal of the deduction resulting from such a contribution? Your seventy-first birthday marks the end of your retirement account eligibility period? You only hold a cash or a margin account, but you do not plan to avail yourself of the borrowing power provided by the latter? An investment you deem potentially lucrative sits in a regular brokerage account and you wish to contribute it in kind to a registered account? Then a Tax-Free Savings Account may be the solution you seek.

Tax treatment

As its name implies, the Tax-Free Savings Account allows you to salt away savings and to reap the fruits of your investments tax free. More flexible than a traditional registered account, the TFSA enables you to shelter your income in perpetuity. All the capital gains realized on your investments as well as all the dividends, distributions, and interest earned from them slip quietly into your pocket without the need to utter a single word of it to the Receiver General. This level of financial discretion is enough, these days, to make a Swiss banker turn green with envy.

Contributions

All taxpayers acquire TFSA contribution rights at an identical pace, these rights are cumulative and they do not include an expiry date. As soon as you reach the age of majority, the meter starts running provided that you officially reside in the country. Since its inception in 2009, the contribution room accumulated by anyone who was an adult at the time stands at $57,500 today. Therefore, you can always postpone your contributions if you do not want to take immediate advantage of the unused rights you have garnered.

Withdrawals

Contributions made to a TFSA do not result in tax deductions and withdrawals do not constitute taxable income. So you incur no penalty as an investor when an unforeseen expense—or the trip you have been dreaming of—requires that you dig into your nest egg to make ends meet.

Moreover, although you should always think twice before breaking your piggy bank, any amount withdrawn can be re-contributed starting on January 1st of the year following its withdrawal without lowering one iota the additional limit that the Canada Revenue Agency grants you—along with every other taxpayer—as a New Year’s gift.

Eligible investments

Because the services that NBDB offers are tailored to independent investors, you must determine your portfolio’s composition, asset allocation, and diversification according to your investment horizon as well as your risk tolerance. Whether you invest in stocks, options, Exchange-Traded Funds, bonds, mutual funds, or GICs, you are free to choose among a wide array of investment products, including international securities. However, income earned from a foreign source in a TFSA may be subject to tax withholding if the country of origin does not recognize the special status Canadian tax authorities have granted it.

Estate transfers

This type of account considerably simplifies estate planning since the assets held can be transferred without any tax liability into the survivor annuitant’s own TFSA.

Thus, in contrast to the fatalism expressed in the introduction by one of the signers of the United States Declaration of Independence, the holder of a Tax-Free Savings Account escapes, even upon his demise, the duties that usually befall a Canadian taxpayer.

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