Wow! The Tax-Free Savings Account
The 2008 Federal Budget has an incredible treat for individual investors: The Tax-Free Savings Account or TFSA. This is how it is described in the budget press release: "This flexible, registered, general-purpose account will allow Canadians to watch their savings—including interest income, dividend payments and capital gains—grow tax-free." Let's take a closer look at how this will work.
The Basics
The TFSA will be a new type of registered account available to all Canadians over the age of 18. Up to $5000 can be contributed to your TFSA each year. Unlike RRSP contributions, deposits into a TFSA are not deductible for income tax purposes. However, all income produced within the TFSA -- including interest, dividends and capital gains -- will not be subject to income tax. The amazing part is that withdrawals from your TFSA are also tax free. So, unlike an RRSP, you can take money out of your TFSA and not have to pay any income tax on it. You can make a withdrawal from your TFSA for any purpose at all: a new car, a renovation, a new business or a vacation.
Any unused portion of your yearly contribution limit of $5000 gets carried forward so you can always make up for years when you didn't contribute. Also, any money you take out of your TFSA can be put back in without reducing your contribution room. With an RRSP, when you take money out, you lose that contribution room so you can't put the money back in.
Income earned within a TFSA and withdrawals from a TFSA will not affect your eligibility for federal benefits and credits normally dependent on your net income. This includes the Guaranteed Income Supplement (GIS) and the Canada Child Tax Benefit.
You can take a look at the pamphlet on the TFSA on the budget website for some more details if you are interested.
My Initial Thoughts
Well, I am impressed. I love the fact that income generated within the TFSA is tax free. I love the fact that you can take money out, at any time, for any reason, tax free. Being able to put the money back in later is also a great bonus.
For anyone looking to build an investment portfolio that generates income, the TFSA offers excellent tax protection for that income.
I'll have to sit down and crunch some numbers but my initial assessment is two thumbs up!
Of course, the budget has only just be tabled in the House of Commons. It still needs to be debated, voted on and get through the Senate. If it does pass, the TFSA won't be available to Canadians until 2009. So we've got lots of time to debate its merits and run our calculations! Lot's of fun.
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Comments
You are kidding right? What
You are kidding right? What exactly are you saving - peanuts? This is AFTER TAX MONEY! You have already paid income/corporate taxes at huge rates of 20, 30 40, or 50% - and then the government hands back pennies - wow yeah what a great deal................NOT!
No, I'm not kidding. I guess
No, I'm not kidding.
I guess what is so great is that, currently, I invest my after tax money. Then, any investment income I get from that invested money is taxed at 'huge rates' (as you put it).
With the TFSA, I invest my after tax money (just like I do now). Only this time, any investment income is earned tax free. Then, I can take that tax free money earned out of my TFSA and use it for whatever I want without ever having to pay income tax on it. If that investment income is interest income or income trust distributions, then my investment income is effectively increased by 20% to 40% depending on which tax bracket I'm in.
Sure I'd love to not pay any tax in the first place, but that's not going to happen any time soon (although I'd love to proven wrong). So, not paying tax on some of my investment income is a nice bonus for now.
Also, remember that this doesn't replace the RRSP system. If you want to invest your pre-tax money you can put it in an RRSP. You pay the taxes when the money comes out but you still get the tax deferral.
I'd love to hear more about why you don't approve of the TFSA.
This TFSA sounds similar to
This TFSA sounds similar to the US's Roth IRA accounts only better! Better because you can carry forward your unused contributions and you can withdraw the money whenever you want, for whatever reason you want and then repay the amount you withdraw.
I'm with you Peter - this is a great savings vehicle for people who have already maxed out their annual RRSP contributions and would have been saving in a taxable account anyway. I'm not sure why the first commenter is so negative on the TFSA - for some people it'll be a fantastic savings opportunity.
Ok, this is a good thing.
Ok, this is a good thing. Anyone that disagrees doesn't really invest. Currently we are taxed on our money, then we invest it and they tax us again on essentially the same money. It's not perfect but at least we are making more money from the original money.
I just have a question and would like to know if anyone knows the answer. If I set up an incorporated investment business, then personally invest in it and pay myself distributions, is there any conflict of interest here?
If there is not and this would be legal, essentially I could make myself extremely rich with no tax. An example of what you can do is invest your $5000.00 per year into a real estate investment corporation and become the main share holder. Use the invested money as a down payment on an income producing rental property. When the rents and profits are collected I then pay all of the profits to my main shareholder (myself).
If anyone knows the answer to this please let me know. I will be talking to my accountant as well but if this is the case, a lot of already rich people will make themselves a lot more rich.
Anyways, just a thought for all of you doubters out there.
Interesting idea Kevin! I'm
Interesting idea Kevin!
I'm not sure that you can hold shares in a private corporation within a TFSA but you should look into that. Also, your investment corporation would have to pay tax on its profits before paying them out as dividends, so your profits would not be entirely tax free. You might be able to set up your company as an income trust but you'd need to research what the requirements are for that.
Let us know what your accountant says though since it sounds like a neat idea. That's the kind of thinking I like to see!
Another option, since the
Another option, since the TFSA can be used as security on a loan, is to use the TFSA to hold all of your interest bearing assets, then use it as security on an investment loan to buy dividend paying stocks. Now suddenly your portfolio is worth more, and generates both tax free interest and tax efficient dividends.
Now, if only I can come up with 5K before January.
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