In 1969 the maid of honour at my sisters wedding was a pretty sandy-haired young woman whose family lived on one of the steeper streets in the hilly North Vancouver suburb of Lynn Valley.
Its not her wavy hair or her pleasant demeanor that come to memory so much as the bridesmaids name: Eileen Downward. It still brings out the giggles in me.
I lean downward.
Well I suppose you do! Nineteenth is a steep road to walk home on.
Her brother Peter also attended the ceremony as I recall.
Tax Free Savings Accounts - part one
This is an increasingly great idea, but like the bridesmaid above, the name conjures up something less than it might. Its just that savings accounts per se dont have much appeal in an environment where they typically earn well shy of two per cent.
Dont use your TFSA as a savings strategy so much as an investment strategy. The only advantage to a TFSA is that your potential gain is tax-free.
If there is to be some equity risk somewhere in your overall portfolio, I lean toward using part of it in a TFSA to maximize tax-free growth. Otherwise the benefit peters downward rather quickly, like an over-used proclivity for puns.
Income-splitting opportunities
Gifts to a spouse
If there is a higher-income spouse and a lower-income spouse in your household, you may be able to benefit from some potential income-splitting opportunities using the TFSA.
When a higher-income spouse provides funds to their lower-income spouse to contribute to their TFSA, the lower-income account holder will not pay tax on the investment income and capital gains they earn in the account.
Consequently, unlike a non-registered account, the income attribution rules will not apply to the spouse who provided the funds.
This may help achieve family income-splitting, plus, as the funds in the account accumulate tax-free, there is no impact on any spousal tax credits that the higher-income spouse may be able to claim for the lower-income spouse.
Conventional income-splitting strategies consider the source of the funds being invested to determine the tax consequences.
In contrast, when you gift funds to your spouse to invest in their TFSA, both you and your spouse can earn tax-free investment income, irrespective of which spouse contributed the funds.
The TFSA allows tax-free growth on the funds in the account, so there is greater potential for investment growth as the contribution made by each spouse builds over time.
It is also worth noting that if you have a lower-income spouse who has little or no earned income with which to build registered retirement savings plan (RRSP) contribution room, they may still be able to accumulate some additional retirement savings using their annual TFSA contribution room. The TFSA contribution room will continue to accrue throughout their lifetime whether or not they have earned income.
Gifts to adult children
You can use the TFSA, in addition to a registered education savings plan (RESP), as another tax-sheltered way to save for a childs education. If you gift funds to a child who is over the age of 18, they can contribute to a TFSA and they will not pay tax on the investment income they withdraw from the account as they would with RESP withdrawals. Note however that contributions to a TFSA will not attract the Canada Education Savings Grant.
Should I borrow to place funds in my TFSA?
This is a very personalized question, but generally... debt is bad. If you are considering borrowing funds to invest in a TFSA as part of your overall financial plan, note that you will not be able to deduct the interest you pay on the borrowed funds.
However, if you have short-term borrowing needs and dont want to withdraw funds from your TFSA, you can use the assets in your TFSA as collateral for a loan.
Using your RRSP as collateral in this way is not permitted.
This article is for information purposes only and should not be construed as offering tax or legal advice.
Mark Ryan is an advisor in Prince George with RBC Wealth Management, Dominion Securities, and can be reached at [email protected].
