The Tax Free Savings Account (TFSA) was introduced by the Canadian government in 2009. TFSAs allow Canadians over the age of 18 to save without paying tax on what the account earns, whether that is in the form of interest, dividends, or capital gains. These accounts have the flexibility to allow you to withdraw money without worry of tax implications. Any unused contribution room can be carried forward indefinitely. The annual limit is dependent on the index for the year. As the TFSA is a registered account, you would be allowed to place your money in many of the same investments as an RRSP. PlanWright Financial uses mutual funds† and segregated funds as investment options.
For more information on your current contribution room, visit the Canada Revenue Agency.
You can generally withdraw any amount from a TFSA at any time and for any reason, with no tax consequences. However, you cannot contribute more than your TFSA contribution room in a given year, even if you make withdrawals from the account during the year. Withdrawals, excluding qualifying transfers and specified distributions, made from your TFSA in the year will be added back to your TFSA contribution room at the beginning of the following year. If you over-contribute in the year, you will be subject to a tax equal to 1% of the highest excess TFSA amount in the month, for each month you are in an excess contribution position even though you made a withdrawal in the same year.
Please see the following example:
In 2019, Phil contributed $5,000 to his TFSA. In 2020, he makes another $5,000 contribution to his TFSA. Later that year, he withdraws $3,000 for a trip. Unfortunately, his plans change and he cannot go. Since Phil already contributed the maximum to his TFSA earlier in the year, he has no TFSA contribution room left. If he wishes to re-contribute part or all of the $3,000, he will have to wait until the beginning of 2021 to do so. If he re-contributes before 2021, he will have an excess amount in his TFSA and he will be charged a monthly tax of 1% on the highest excess TFSA amount for each month that an excess exists in the account. The $3,000 will be added to his TFSA contribution room at the beginning of 2021.
RDSPs were introduced in 2008 to provide some financial security for disabled individuals, whether they deal with a mental or a physical disability. The RDSP is a tax-deferred savings vehicle, similar to an RRSP. Parents or loved ones may contribute to the plan for their child or the disabled individual could contribute to it themselves.
- Must be a Canadian citizen
- Qualify for the Disability Tax Credit (DTC)
- Be less than 60 years of age
- Have a valid SIN
Only one plan can be established per beneficiary. The disabled individual may establish the plan unless they are not legally competent to sign a contract. In this case, a qualifying family member (parent, spouse, common-law partner) can establish a plan. Otherwise, other people would need to go through a formal process to obtain legal grounds to represent the disabled individual. The person besides the disabled individual would be known as the holder, while the disabled person is the beneficiary.
- Lifetime limit of $200,000
- No annual limit
- Not tax-deductible
- Must cease by the end of the year the beneficiary turns 59
Government grants and bonds are available for this plan to assist with saving. There is the Canada Disability Savings Grant (CDSG), which is dependent on family income and the amount contributed. These grants are limited to a $70,000 lifetime limit and are payable until the end of the year that the beneficiary reaches 49.
|2016 Family Net Income||CDSG Matching Rates||Matching Annual CDSG|
|Up to or equal to $90,563||300% on the first $500
200% on the next $1,000
|Greater than $90,563||100% on the first $1,000||$1,000|
If you were to start a plan now, there would be unused grants that are available for a 10 year period. However, it would be the best choice to maximize your contributions for the current year plus two previous years to maximize the grants. Only $10,500 of the grant is payable per year. If you contributed $4,500, you would receive the maximum grant for the current year and the previous two years. Contributing the maximum per year would allow you to catch up on previous unused grants, thus growing your account immensely.
Canada Disability Savings Bond (CDSBs) are also available for lower income families. The beneficiary may receive up to $1,000 from the government, depending on family income. These are subject to a lifetime limit of $20,000, until the end of the year that the beneficiary turns 49. Unused bonds may be carried forward for a period of 10 years.
When withdrawals occur from the RDSP, the money will be taxed in the hands of the beneficiary. There are Lifetime Disability Assistance Payments (LDAPs) and Disability Assistance Payments (DAPs).
Your company, wholly owned by you, has $1,000,000 in securities. Since the paid-up capital is nominal, any distribution of its retained earnings will be treated as a taxable dividend.
How to Solve the Problem
You sell the securities and acquire a single premium immediate life annuity with no guarantee on a non-prescribed basis. As you are in your late sixties, a large proportion of the income is a return of capital.
You now use a portion of the proceeds to pay the premiums on a $1 million policy on your life. At your death, the annuity payments cease and the company receives $1,000,000 from the life policy.
If your shares have been left to your wife or in a spousal trust, the shares roll over with no tax liability. Or, if the company is wound up, either party will receive a tax-free dividend out of the Capital Dividend Account.
†Mutual funds and related financial planning services are offered through Credential Asset Management Inc.
PlanWright Financial is a wholly-owned subsidiary of Encompass Credit Union.