By now, you probably know a lot about the Tax Free Savings Account (TFSA) that came on line on January 2nd 2009. And you may be wondering if it’s a good idea to transfer some of your existing non-registered assets into a TFSA to avoid future taxation on the investment income. Here’s your answer: Yes it is a good strategy – as long as you are aware of the tax implications.
First let’s review the benefits of a TFSA:
• It allows you to use your savings to invest in eligible investment vehicles and the capital gains and other investment income earned in your TFSA will not be taxed.
• ‘Eligible’ investments are generally the same as those allowed in an RRSP – mutual funds, publicly-traded securities, government bonds, GICs, and segregated funds.
• TFSA contributions are not deductible from income for tax purposes.
• But investment income, including capital gains, earned in the TFSA will not be taxed, even when withdrawn.
• TFSA funds can be withdrawn at any time for any purpose.
• Withdrawn amounts can be put back into a TFSA without reducing contribution room.
• Unused TFSA contribution room can be carried forward to future years.
· Now let’s look at how to make tax-advantaged transfers:
• In most cases, you will be ‘selling’ an existing investment and re-investing the money in your TFSA.
• If you’re selling a GIC-type investment, no problem – you’re moving from an investment with fully taxable income into a tax-free investment vehicle.
· However, if you are selling non-registered investments that produce capital gains or losses, factor in the tax consequences:
• If your non-registered investment is in a ‘gain’ position, making an ‘in-kind’ transfer directly into your TFSA will trigger a ‘disposition’ and you’ll pay tax in the year of the transfer on 50% of the gains.
• If that investment is in a ‘loss’ position and you make an ‘in-kind’ disposition into your
· TFSA, you will lose the loss because the CRA will deem it to be ‘nil’.
But … as long as you transfer the investment into another investment inside the TFSA you will trigger the loss and be able to use it against ‘gains’ made in the past three years, this year, or in the future. If you wish the TFSA to hold the original investment, you must wait at least 30 days before the TFSA purchases this investment to be able to use the loss.
Tax planning and the effective use of TFSAs are essential parts of almost any financial plan.
Your professional advisor can help make sure your total plan is greater than the sum of its parts.
This column, written and published by Investors Group Financial Services Inc. (in Québec – a Financial Services Firm), presents general information only and is not a solicitation to buy or sell any investments. Contact a financial advisor for specific advice about your circumstances. For more information on this topic please contact your Investors Group Consultant. Chris Cochrane – Consultant 800-933-3489 ext. 226