What’s so great about a Tax Free Savings Account?

When the Canadian government first introduced the Tax Free Savings Account (TFSA), it was most often used as a regular bank savings account where the interest was not taxed.  But it can be so much more useful than that:

1. If you haven’t used a TFSA before, you can contribute up to $36,500 in 2015, and you can contribute another $5,500 each year after that (maybe more, as the contribution limits are periodically increased for inflation).  If you can’t make a contribution one year, you can carry forward your contribution room indefinitely.
2. You can invest in a wide variety of investments – savings accounts, GICs, bonds, stocks, mutual funds, exchange-traded funds (ETFs), etc. – which can make the TFSA a great long-term savings and investment tool rather than just a short-term emergency fund.
3. Any interest, dividends, or capital gains you earn inside the TFSA are not taxable.  For example: let’s say you are in a 35% marginal tax bracket and you contribute $36,500 to your TFSA.  If you earn 2.5% interest on your funds, that’s $912.50.  In the TFSA, because you don’t pay tax on the interest, your funds are worth $36,912.50 after a year.  In a non-registered account, after you paid 35% income tax, you’d only have $36,593.13 after a year – a difference of $319.37 in just one year.  And the difference compounds over time, so it can really add up.
4. When you take money out of your TFSA, the withdrawal is not taxable.
5. You can withdraw money from your TFSA one year and contribute it again the next calendar year.  So if you have to withdraw some of your TFSA funds to cover emergency costs or top up your RRSP contribution, you can put the same amount back into your TFSA the following year to replace what you withdrew.  And that’s in addition to the new contribution room you get every January!
6. It’s a terrific estate planning tool in BC because you can name beneficiaries on your TFSA, so the funds can pass directly to your spouse or children without having to go through your Will, which avoids probate fees and makes the transition of the funds simpler and faster (not all provinces give you the ability to name beneficiaries, so you should check on the rules for your province)

Combined, all these features make the TFSA a very flexible tool in your financial plan.  Not only can it save on income taxes now, it can also help you maximize the growth of your funds during your lifetime and simplify your estate in the future.

Business Owners

The most overlooked area of financial planning for business owners and incorporated professionals is the lack of integration between corporate and personal assets. When the majority of your assets are in your corporation you need very specific, specialized and personalized financial advice.

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