Doing little things right over the course of your life can make a big difference to your family’s financial well being. Tax Free Savings Accounts (“TFSA”s) are one such thing whose benefits can really add up over time.
While contributions are made to a TFSA with after-tax dollars, these plans are attractive in that the investment growth (Canadian interest, Canadian dividends and capital gains) accumulates tax-free. Better yet, all this accumulated principal and growth can be paid out tax-free. This rule applies when one makes withdrawals for personal spending or for gifting, and when TFSAs are left to your heirs as part of your estate plan. The other good news is that simply holding a TFSA or withdrawing from one during your lifetime does not negatively impact income-tested benefits and credits, like the Guaranteed Income Supplement, Old Age Security payments (claw back) or the age credit. Tip #1: the TFSA provides great tax and non-tax benefits to people of all income levels and is of great value to heirs.
You can either designate a spouse as a successor holder for your TFSA in your Will (with proper terms included) or an even easier way is to make the successor holder designation right in the plan documentation with help from your financial adviser. A successor holder spouse who inherits the plan gets to preserve their spouse’s built-up plan contributions plus they can contribute to the inherited TFSA by adding on their own accumulated contribution room. They can keep two plans or choose to combine the inherited plan with their own existing TFSA. Using a successor holder designation for your TFSA avoids probate fees on the plan and continues the tax preferences of the inherited TFSA on to the spouse. Tip #2: naming a spouse as successor holder makes for smart tax and estate planning.
You may also name someone else as a beneficiary (e.g. child, grandchild or sibling). In this case, the TFSA at your death would be de-registered and those TFSA assets would transfer tax-free to the beneficiary and they would benefit from the bumped-up cost base. Although other beneficiaries do not inherit your contribution room, as a spouse can, these beneficiaries can establish their own TFSA from the inherited assets and use their own unused accumulated contribution room. Using a beneficiary designation for your TFSA avoids probate fees on the plan. Tip #3: even if you name a spouse successor holder, you should still name a beneficiary in case the successor holder dies before you.
A common practice has been to hold interest-bearing investments inside TFSAs to shelter highly taxed interest income. While this makes logical sense, holding capital gain growth assets in your TFSA may be a good alternative if these assets are planned to be kept and can serve to minimize tax on high growth assets down the road or at the time of death. Also, while Canadian dividends and interest are specifically tax-free in a TFSA, non-Canadian dividends, such as those paid by U.S. stocks, or foreign interest are subject to withholding taxes in a TFSA and there is no way to get these taxes back. RRSPs do not have withholding taxes applied so are better vehicles to hold foreign securites, as are non-registered accounts where at least you can claim foreign tax credits on your income tax return. Tip #4: review with your financial adviser the asset composition of all of your investment accounts and allocate assets to the TFSA based on your personal situation.
The good news is that the annual TFSA limit has gone up to $6,000 as of January 1, 2019. If you are age 18 and over and are a Canadian Resident you can contribute to a TFSA. If you have never contributed to a TFSA, depending on your age, you could contribute up to $63,500 (for those who were age 18+ in 2009). Tip #5: contribute the newest amount early in 2019 and any accumulated limit for yourself, your spouse and as financial gifts for children or adult grandchildren to maximize the tax benefits of the TFSA for your family.
If you’d like more information on this or other investment strategies, please contact a member of our team at firstname.lastname@example.org.