Tax-Free Savings Account (TFSA)
This was the big story of 2009. Any Canadian resident 18 or older is entitled to earn tax-free investment income in this registered account by contributing up to $5,000 each year. Unlike an RRSP, there is no upper age limit and you do not have to have “earned income” to qualify. However, there is also no tax deduction for contributions to the account. Any investment that is eligible for an RRSP will be allowed in a TFSA.
Every Canadian will accumulate TFSA contribution room each year simply by filing a tax return and unused contribution room may be carried forward.
Earnings in the plan are tax exempt and withdrawals from a TFSA are not reported as income (in contrast to an RRSP). Withdrawals also free up contribution room of an equivalent amount. This makes the TFSA an extremely flexible savings vehicle.
For more information, visit http://www.cra-arc.gc.ca/tx/rgstrd/tfsa-celi/menu-eng.html.
Stopping TFSA Abuses
TFSA transactions occurring after October 16, 2009 are subject to new penalty provisions aimed at stopping taxpayers from abusing the rules governing TFSAs.
- Deliberate Overcontributions Excess contributions (normally made in error) are subject to a penalty of 1% per month until the amounts are removed. However, any income attributed to deliberate overcontributions will be subject to a 100% tax.
- Prohibited and Non-Qualified Investments Investments that are eligible for an RRSP will be allowed in a TFSA. Those that are prohibited include shares of a company in which the holder has a significant interest (10% or more) or investments in non-arm’s length entities. Income attributed to these types of prohibited investments will be subject to a 100% tax.
- Asset Transfer Transactions These complicated transactions involve swapping investments between say, an RRSP and a TFSA, with no intention of disposing of the asset, in order for the gains on the investment to be realized in the TFSA. To prevent this type of abuse, 100% of these gains will be subject to tax
For more information, visit http://www.fin.gc.ca/n08/09-099-eng.asp.
Registered Disability Savings Plan (RDSP)
This savings plan was established to help parents and others save for the long-term financial security of a disabled person (one who qualifies for the Disability Tax Credit).
Income earned in the plan is sheltered from tax. However, contributions to the plan do not qualify as tax deductions. Anyone can contribute to an RDSP, not just family members. Visit http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/rdsp-reei/menu-eng.html for more information.
Capital Loss Planning
One of the few silver linings of the financial meltdown was the ability to use capital losses to reduce taxes paid or owing. Because the values of most stocks and mutual funds were hit so hard, their sale produced a capital loss. These capital losses are first used to offset any capital gains realized during the year (unlikely in 2009) to lower your current year’s taxes. If losses remain, they may then be carried back to offset any capital gains realized in the previous three years (gains were more likely back in 2006, 2007 or 2008) by completing form T1A Loss Carry Back. A refund will be issued. Any remaining capital losses (2009 was a really bad year) can be carried forward indefinitely to offset future capital gains. Content in this section is provided in partnership with the Investor Education Fund, a non-profit organization promoting financial literacy to Canadians. To find out more go to GetSmarterAboutMoney.ca.