By Susan Merivirta, Chief Financial OfficerCorporate News
Important Dates for Tax Time:
- Deadline for filing 2008 tax returns is April 30, 2009
- Deadline to make RSP contributions for 2008 is March 2, 2009
Receipts will be ready as follows:
- T4 Statement of Employment Income by February 15, 2009
- T5 Statement of Investment Income by March 1, 2009
- 2008 RSP Balance of Year RSP Contributions from March 2 to December 31, 2008 and T4RSP Statement of RSP Account Income by March 1, 2009
- Receipts for RSP contributions made in the first 60 days of 2009 starting in March.
The Tax-free Savings Account
The following is a summary from a Deloitte newsletter – TaxBreaks, December 2008.
Many people view the tax-free savings account (TFSA), presented in the 2008 federal budget as the most significant innovation in the treatment of saving in half a century.
It is the feeling of the people at Deloittes that all Canadian-resident adults can benefit from a TFSA, no matter their revenue.
Comparing TFSAs and RRSPs
- Starting January 1, 2009, Canadian residents aged 18 and older will be able to contribute up to $5,000 (to be indexed as of 2010) to a TFSA each year. Contribution limits to RRSPs are based on a percentage of earned income, up to a set annual maximum.
- As with RRSPs, investment income will accumulate in the TFSA free of tax. Unlike the RRSP, contributions to a TFSA will not be deductible, but withdrawals will be truly tax exempt, as the contribution funds in the TFSA will have already been taxed. This means that whereas the tax benefit from an RRSP contribution is immediate, the benefits from a TFSA contribution are deferred.
- Moreover, in contrast to RRSPs (where the funds are accessible tax-free only in certain circumstances, such as the purchase of a first home under the home buyer’s plan), withdrawals from a TFSA will be allowed at any time, and will not lead to any loss of contribution room.
- In addition, there is no upper age limit for contributors, whereas RRSPs must be terminated the year in which the taxpayer turns 71.
- The TFSA is a tax-prepaid plan rather than a tax-deferral plan. As such, there is no possibility of tax-free transfers from a registered plan, such as an RRSP, or from a retiring allowance. However, a key benefit lies in the fact that investment income earned inside a TFSA is truly tax-exempt, whereas it is merely deferred with an RRSP.
Who can benefit from a TFSA?
Given its flexibility, its simplicity and its accessibility, it is no surprise that the TFSA has created tremendous interest.
- INDIVIDUALS WITH NO CURRENT RRSP CONTRIBUTION ROOM A high-income earner who has surplus liquidity but has maxed-out his or her RRSP contribution room, possibly because an employer’s registered retirement plan increases his or her pension adjustment, will find that a TFSA offers an interesting alternative or complement to a non-registered taxable investment account.
- Although this maximum annual contribution might appear modest, it is cumulative. More significantly, TFSA withdrawals will reestablish contribution room, which allows an individual to cash out accumulated gains and contribute again to replace investments (starting in the calendar year after the year of withdrawal) without any impact on income.
- As the ability to contribute to a TFSA is not based on earned income, an individual who has never earned eligible income, such as employment or business income, for RRSP purposes, can also benefit from a non-taxable investment account. And in addition to this feature, no attribution rules are applicable to the revenue to the contributions, meaning that the TFSA can be used as a tool to split income between a couple or even within a family.
- YOUNGER TAXPAYERS AND PEOPLE WITH SHORT-TERM NEEDS Given that funds can be withdrawn from a TFSA at any time without tax consequences, younger individuals who may want to use their savings (to establish a career, buy a hours, and raise young children) will find it a very attractive alternative to an RRSP, which would restrict access to their savings at the time when their need for money is greatest.
- The TFSA is a good vehicle to save for short-term needs. The accessibility of the funds also makes it a great tool to implement a rainy-day fund for unexpected expenditures or circumstances. And as there is no upper age limit for contributions, seniors might also benefit from that flexibility.
- LOW-INCOME EARNERS Because neither withdrawals from nor income earned within a TFSA are included in the taxpayer’s net income calculation, the TFSA is an effective tool for individuals who receive income-texted benefits, such as the child tax benefit, the GST credit, the guaranteed income supplement (GIS), or old age security (OAS). The TFSA has been hailed by many anti-poverty advocates as a significant incentive for low-income earners to save money that will be free of government clawbacks. Although some critics argue that the TFSA will not help these individuals who are already struggling to meet their basic needs and can barely afford to save, it must be acknowledged that the absence of a clawback associated with TFSAs can be a significant advantage for low- and moderate-income earners. Not only is the tax-deductibility of RRSPs of little value to them, but RRSP income on retirement reduces their entitlement to GIS benefits, the primary purpose of which is to deliver a minimum standard of living to the elderly. The government is thereby sending a paradoxical message to these taxpayers, encouraging them to save on the one hand, but punishing them on the other. The introduction of TFSA will correct that situation by ensuring that lifetime savings will not reduce eligibility for basic governmental support.
- SENIORS Regardless of their income level, seniors are definitely the big winners from the TFSA. As we have just seen, low-income seniors will benefit greatly from the TFSA because income derived from it has no impact on their eligibility for GIS. For medium-income seniors, withdrawals from a TFSA will not reduce amounts received under OAS.
- Because there is no age limit for TFSA contributors, seniors will have access to non-taxable investment income well after the RRSP age limit of 71. The fact that TFSA contribution rights are no based on earned income is also a big advantage for seniors, who may retire before age 71 and will therefore be unable to contribute to RRSPs.
- High-income seniors will also benefit from the possibility of splitting income between the couple by contributing to a spouse’s TFSA, thus doubling the annual saving. Upon death, the deceased spouse’s TFSA can be transferred to the surviving spouse without any tax consequences. The surviving spouse can either roll the assets into his or her own TFSA or hold both accounts separately.
- Seniors will also find it easier to help children or grandchildren financially (for example, to purchase a first house or to study) if they can have access to their savings without being taxed.