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The Tax Free Savings Account

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The Tax Free Savings Account. The most significant change to Canada's Savings System ... Time horizon. Long term: Equity holdings. Higher ROR tax free compounding ... – PowerPoint PPT presentation

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Title: The Tax Free Savings Account


1
The Tax Free Savings Account
A Gem for Canadian Investors
The most significant change to Canadas Savings
System since the introduction of RRSPs
2
Agenda
  • Intro
  • The TFSA defined and compared
  • How itll work
  • How to make the most of it
  • Applicable Investment Strategies

3
TFSA, How popular will it be?
  • Most dramatic change since RRSP
  • Will revolutionize tax treatment regarding
    investments
  • Plan is simple, easily understood by the lay
    person
  • Theres no downside

4
TFSA, an RRSP in reverse
  • RRSP
  • Gives tax deduction for contribution, But
  • Makes all withdrawals taxable
  • TFSA
  • Offers no deduction for deposits, But
  • No tax imposed on investment returns

5
TFSA defined
  • Tax exempt savings account
  • Contributions not tax deductible
  • Annual Max 5 K regardless of RRSP/RPP contrib.
  • Indexed to inflation in 500 multiples
  • Unused contribution room can be carried forward
  • Account growth turns into contribution room
  • Over-contributions are penalized

6
TFSA defined (contd)
  • Investment earnings not subject to income tax
  • Amounts can be withdrawn at any time
  • Withdrawals are added back to total contribution
    room.
  • It does not affect federal income-tested benefits
    and credits (OAS, GIS).
  • Contributions to a spouses TFSA are allowed,
  • Transferable to the TFSA of spouse upon death,
    tax-free.

7
TFSA results
  • Combined federal and provincial tax savings
    based on a 200 monthly contribution for 20 years
    and a 5.5 per cent rate of return. For
    unregistered savings, a 21 per cent average tax
    rate on investment income is assumed (based on 40
    per cent interest, 30 per cent dividends and 30
    per cent capital gains, and a middle-income
    earning account holder)

8
TFSA or RRSP?
  • At first glance, No definite answer

9
TFSA or RRSP? A closer look
  • Real difference is in the tax consequences
  • M.T.R. when contributing vs. M.T.R.
    when withdrawing.
  • Use of the tax refund.

10
TFSA or RRSP? M.T.R. comparison
  • If projected retirement income or M.T.R.
  • Lower than current income RRSP
  • Similar to current income TFSA or RRSP
  • Higher than current income TFSA
  • TFSA beats RRSP
  • Maximize contribution in low MTR years
  • TFSAs nature free of any clawbacks from federal
    tax credit and benefit programs.
  • Ideal for Emergency fund / to finance consumption

11
TFSA or RRSP? Savings objective
  • A withdrawal of 200 for a specific short term
    need (e.g. remodel the house)
  • From TSFA
  • 200 tax-free
  • can be re-contributed without affecting room
  • From RRSP savings
  • need to withdraw up to 370 to pay taxes
  • contribution room is lost.

12
Appeal of TFSA RRSP mix
  • Flexibility / ability to decide, year-by-year
    basis, whether or not to pay tax on
    withdrawals
  • Some years, keep taxable income down,
    to minimize clawback of government
    benefits
  • Other years, want taxable income,
    to use up losses or for other
    reasons
  • Having a TFSA and an RRSP will make good sense.
    It's all about flexibility later.

13
TFSA, How much? Who?
How much will Canadians contribute? 20 billion in
2009 Who will contribute?
Budget assumption 2/3 by
low-income Canadians UK experience
50 of high-income individuals 30
lower income UK citizens. Individuals
over age of 55 have the higher tendency to
contribute to the ISA.
14
TFSA, Where will the money come from?
  • Over 40 of Canadians likely to use new money
  • Very significant for younger generations

UK's ISA MarketBy Age and Income and Growth
Pattern
15
Appeal Versatility / RRSP companion
  • 40 of workers in RPP
  • Compensation for the P.A. that limits RRSP
    contributions.
  • High earners
  • A welcome addition to RRSP contribution room
  • Seniors
  • Additional savings device free of tax to
    continue saving beyond cut-off age of 71 for
    making RRSP contributions
  • Low-income individuals
  • Who contribute to an RRSP- Success limited
    at best
  • Ideal for immediate needs
  • Emergency funds / tax efficient way for
    Canadians to finance consumption.
  • Estate Planning
  • Assets can be transferred tax free without
    affecting the recipients contribution room

16
Appeal(contd)
The data gathered between April 30th and May 5th,
2008. Sample size 2,613.
17
TFSA Asset Allocation Decision
  • How much of a benefit you'll get from tax
    sheltering provided
  • Marginal tax rates on investment income ('07 tax
    year)
  • B.C. resident making 50,000 per year
  • Interest income 30.7
  • Capital gains 15.3
  • Ontario resident making 100,000 per year
  • Interest income 43.4
  • Capital gains 21.7
  • Nova Scotia resident making 150,000 per year
  • Interest income 48.3
  • Capital gains 24.1
  • SOURCE ERNST YOUNG TAX'S ONLINE 2007 PERSONAL
    TAX CALCULATOR

18
TFSA Asset Allocation Decision
  • Can shelter any investment held in an RRSP
  • Time horizon
  • Long term Equity holdings
  • Higher ROR tax free
    compounding
  • Short term Income paying holdings
  • Minimize fluctuations in value
  • Interest income 100 tax free
  • Investment Objective

Recommendation A well diversified portfolio TFSA
losses mean an absolute loss of precious
contribution room
19
Maximize TFSAs benefit
  • Post-retirement tax shelter
  • RRIF MAP to TFSA when income is not needed.
  • Assets will continue to grow tax free until
    withdrawn
  • Partially replaces Universal Life Insurance
  • RESP replacement
  • TFSA eliminates all the restrictions and
    potential penalties
  • Dont borrow to invest
  • Interest payments are not deductible
  • As loan collateral

20
Maximize TFSAs benefit
  • Contribution in-kind from an open account.
  • File a tax return, even if you dont have to pay
    tax
  • TFSA within an investment plan
  • Retirements MTR higher maximize TFSA
    contribution
  • Retirements MTR lower
  • supplement maxed-out RSP contribution
  • otherwise use for other saving goals (i.e
    emergency fund)
  • Income-splitting
  • No attribution rules apply to the investment
    income earned.
  • As the years pass and the contribution
    entitlement builds,

21
TFSA _at_ CI Investments
  • Prepared to compete
  • All Mutual funds / Corporate Class funds
  • Income solutions Portfolio Series are
    particularly appealing
  • Portfolio Select Series 5,000 transfers /
    deposits
  • T-Class
  • SunWise Elite Plus Gteed Tax-free Income for
    Life
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