By now you should have brimmed your tax-free account with that sexed-up contribution amount. On Tuesday evening, shortly after the federal budget was dropped, this pathetically prescient blog told you to go forth and multiple when the sun rose. Now that you are allowed to plunk down ten grand for 2015, we said, you should do so. Like, immediately.
Lots of people didn’t because they were afraid. The media piled on. So did opposition MPs, some of whom were vexed about the increase itself. The banks wussed out. It took more than three days for reality to dawn on people that it was all perfectly legal.
For the record, when a federal finance minister stands to deliver a budget, which is immediately followed by the tabling of a Ways and Means motion, the sucker’s done. It has the force of law. The reasoning is simple – if governments gave advance notice of specific tax changes then people would scurry around and find ways to thwart them. Se because every citizen must be treated equally (except if you’re in the Senate. Or are Justin Beiber) when the finance minister says something, it is effective that moment.
My advice, of course (as always) was correct. So on Friday the government took the unusual step of actually spelling it out in crayon. “The Canada Revenue Agency (CRA) is allowing individuals to immediately benefit from the proposed increase to the Tax-Free Savings Account (TFSA) annual contribution limit announced in Economic Action Plan 2015,” it said. “Canadians can immediately start contributing to their TFSA up to the proposed $10,000 annual contribution limit. This proposed measure is subject to parliamentary approval. Consistent with its standard practice, the CRA is administering this measure on the basis of the Budget announcement. Financial institutions may immediately allow existing and new account holders to contribute up to the proposed maximum.”
So there ya go. Dig in.
Now, here’s an oft-asked question: if the TFSA is beefed up like this, should I cash in an RRSP to contribute to it? The answer is a clear maybe. If you’re in school, on mat leave, have your ass fired or are taking a sabbatical, then deregistering an RRSP and moving the money to a tax-free account can make great sense. You’ll be in a low tax bracket and so might pay little or nothing on the RRSP funds received. You can then move them into the TFSA, invest in cool stuff like equity ETFs, enjoy taxless growth, and have full access to the money when you wrinkle.
Just remember to take the money out of the RRSP in small amounts of $5,000 or less to keep the withholding tax at 10%. Except in Quebec, where you pay more (of course).
Another common question: my spouse stays home and looks after the kids and has no real income. Can I contribute money to his/her TFSA?
No, you can’t. But you can gift money to your significant other, and then he or she can make that contribution. The money you give will earn returns inside the TFSA, and none of those will be attributed back to you. So, obviously, this is a great way to shift income and increase the tax-free earning power of your partnership. With the new limit, a couple can sock away $82,000, and that will now increase by $20,000 a year.
Yes, this is starting to be serious money. If you max out today, put in the twenty grand for ten years and earn an investment return of 7%, a decade from now you’ll have $437,635, of which $155,635 is tax-free growth. Now imagine if you were 20 years from retirement and did the same. You’d have $1.14 million – which could generate about $79,000 a year in tax-free income without diminishing the principal, and none of that would be reportable. So, conceivably, millionaire couples could be collecting their full CPP and OAS benefits, have the taxable income of a golden retriever, and live a happy life. All because of the TFSA.
By the way, if you’re an old fart and have to convert your existing RRSP into an income-spewing RRIF (the minimum withdrawal amounts just fell), you can still contribute fully to a TFSA. So while the RRIF money needs to be included in your taxable income, you can just invest it inside the TFSA and continue to grow it – with the returns never to be taxed again. Unlike RRSP contributions, which end at 71 (unless you marry a young babe and do a spousal), the TFSA contributions are eternal.
Another question I hear: can I open TFSAs for my kids and load them up?
Same answer. No. But you can gift them the money and nothing will be attributed back to you for tax purposes. Kids with social insurance numbers who are full-time Canadian residents get to open a TFSA at age 18, unless they live in places where maturity is delayed, like BC. But even though they have to wait a year, annual contribution room of $10,000 starts accumulating in the year in which they turn 18.
Obviously having five TFSAs in a family with three over-18 kidults means you can take $50,000 a year in taxable investment assets and move them over into tax-free accounts. At that rate it won’t take long to shelter hundreds of thousands, which is exactly why anti-TFSA critics are beside themselves. This is the ultimate dodge, allowing families to turn fully-taxed investment portfolios into deep pools of money that can grow rapidly, attract no tax ever, provide non-reportable income and allow all government pogey.
You may have come here to read about real estate. But don’t dare blow this.