If the questions in Investor Clinic's inbox are any indication, Canadians suddenly got a lot more interested in tax-free savings accounts.
That's understandable. With the federal budget nearly doubling the annual TFSA contribution limit to $10,000 – effective immediately – TFSAs are going to play an even bigger role in our financial lives.
Because some of your questions are technical in nature, I invited Jamie Golombek, managing director, tax and estate planning, with CIBC Wealth Advisory Services, to help answer them.
My wife and I are both retired and have substantial registered retirement income funds (RRIFs). In light of the increase in TFSA contribution room to $10,000 annually, would it make sense to withdraw more than the required minimum from our RRIFs and use the funds to make the maximum TFSA contributions?
RRIFs and TFSAs are similar in that both allow you to earn tax-sheltered investment income. The key difference is that TFSAs are funded with money on which income tax has already been paid, whereas RRIFs contain pretax dollars. As such, TFSA withdrawals are tax-free but RRIF withdrawals are taxable.
If you assume a constant effective tax rate, the benefits of RRIFs and TFSAs are identical. In that case, there would be no advantage to shifting additional funds from a RRIF to a TFSA.
"Withdrawing excess funds above the required minimum annual amount from a RRIF to put into a TFSA would only make sense if you expect your marginal effective tax rate today – including the effect of reducing any income-tested government benefits (such as the Guaranteed Income Supplement, Old Age Security, the age credit, etc.) – to be lower than your expected marginal effective tax rate in the future, including upon death," Mr. Golombek says.
To max out my spouse's $10,000 contribution room, am I allowed to gift stocks in-kind from my regular trading account to my spouse's TFSA? If so, are there any tax consequences?
You are not permitted to contribute directly to your spouse's TFSA. However, you can make a gift of cash or securities to your spouse, who can then contribute the cash or shares to his or her own TFSA.
"If the gift is cash, there isn't any issue. But if the gift is securities, there may be issues," Mr. Golombek says.
Specifically, when the shares are gifted from a husband to a wife, for example, the gift automatically takes place at the husband's adjusted cost base and no gain is recognized – at least not yet. When the wife contributes the transferred shares to her TFSA, she is deemed to have sold them at their fair market value and a capital gain is triggered. But the attribution rules in the Tax Act will attribute that capital gain back to the husband. If, on the other hand, the shares have dropped in value, the resultant capital loss cannot be claimed on a contribution in-kind to a TFSA.
Is it better to designate my spouse as a beneficiary on my TFSA, or as a successor holder?
Naming a spouse or common-law partner as successor holder of the TFSA can lead to a smoother transfer of assets.
In such cases, "your spouse will become the holder of the plan upon your death," Mr. Golombek says. (This option may not be available for some TFSAs in Quebec.)
"As a designated successor holder, your spouse could take over the plan with no tax payable. After your death, all income earned in what had been your TFSA, but is now your spouse's, is non-taxable while retained in the plan and upon withdrawal from the plan."
It's more complicated if you name your spouse as the beneficiary (but not as a successor holder) of your TFSA. Your spouse would have until December 31 of the year following the year of your death to contribute funds received from your TFSA – up to its value upon your death – into his or her own TFSA, without affecting your spouse's own unused TFSA contribution room. (Your spouse must file CRA Form RC240 within 30 days after the contribution is made.)
"The disadvantage here is that all income earned on the TFSA assets, as well as any increase in the fair market value of the TFSA's assets, from the date of death until the date the TFSA funds are paid out to the spouse beneficiary, will be taxed as ordinary income to your spouse," he says.
If the contribution to the surviving spouse's TFSA doesn't happen by December 31 of the year following death, then there is no opportunity to make this rollover.
I own a small business. Are TFSAs creditor proof? What about RRSPs?
Federal bankruptcy legislation protects RRSPs from creditors, except for contributions made in the 12 months prior to bankruptcy. "TFSAs don't have this protection," Mr. Golombek says. However, "TFSAs and RRSPs that are insurance products may be off limits to your creditors if the named beneficiary is your spouse, parent, child or grandchild. Some provinces have specific legislation protecting RRSPs, but not TFSAs."
John Heinzl