Thoughts on TFSAs

By: Caroline Nalbatoglu

By now, most of you are familiar with the basics of the Tax-Free Savings Account (TFSA). We’ve heard a lot about how it can work as a supplement or an alternative to other savings plans such as RRSPs. Here are some strategies you may want to consider.

Retirement

A major advantage of the TFSA is that withdrawals are tax-free. While this is a bonus at any time, it’s particularly valuable for those over 65 who may be affected by the clawback of Old Age Security (OAS) payments and the age credit. You may want to consider gradually moving non-registered investments into a TFSA, or making TFSA contributions in lieu of adding to your RRSP, to reduce the impact of this clawback.

Tax Planning Strategy

When strategizing for the long-term, use the RRSP before the TFSA to hold interest-bearing instruments, as interest is fully taxed when received. However, under certain circumstances, it also makes sense to hold dividend-generating investments within a TFSA, as the grossing-up of dividends held in a non-registered account may cause the clawback of the OAS benefit.

Becoming Non-resident

If you decide to move away from Canada permanently, you can still maintain your TFSA; you just won’t be able to add to it once you become non-resident. You can withdraw funds at any time, and they are not subject to tax in Canada. However, because TFSAs are new, other countries have not yet established rules relating to their taxation. You may be subject to tax in your new country of residence on with­drawals and even on the income earned in the plan.

And, while we are on the subject of tax, re­member that you can now add another $5,000 to your Tax Free Savings Account for 2010. Take advantage of this great opportunity!

We invite you to contact your advisor for further information on TFSAs.