Ellen Roseman: Tax-free savings accounts will change investing in Canada
- October 22, 2008 7:42 AM |
- By Ellen Roseman
Money Talks is a daily business column from CBC radio.
Ellen Roseman is a business writer at the Toronto Star.
The tax-free savings account arrives in just over two months. I predict life will never be the same for Canadian savers and investors.
You probably heard that the TFSA was introduced in the last federal budget. You can contribute $5,000 a year and you will never pay tax on the income.
Many people think a tax-free savings account protects only interest income. Think again. You can also avoid taxation on your stock dividends, mutual fund distributions and any capital gains you earn as a result of selling stocks or mutual funds.
I like the TFSA’s flexibility compared to an RRSP. If you take money out of an RRSP, you lose the contribution room forever. But if you take money out of a TFSA, you can put it back the following year - and still get another $5,000 in contribution room.
Moreover, withdrawals from a TFSA are not taxable and won’t interfere with your federal means-tested benefits. Let’s hope all the provinces to follow suit. This will be a big help to lower-income people saving for retirement.
Seniors are often dismayed to find out that RRSP withdrawals are fully taxable at the highest marginal tax rate. They forget about the big tax deduction they received when contributing to an RRSP. Now they tell me: “If I’d known about the high taxes on withdrawals, I would have saved more outside an RRSP.”
Does the tax-free savings account have a downside? Well, the annual contribution limit is rather low compared to RRSPs, but will be adjusted for inflation. You can carry forward your unused contribution room indefinitely, just as you can with RRSPs.
Also, you’re unlikely to get a tax refund for your TFSA contributions. If you love that extra jolt of cash flow from RRSP contributions to make purchases or pay down debts, you will be disappointed. An RRSP tax refund can also be leveraged to contribute to a registered education savings plan and get a 20 per cent federal top-up grant.
The TFSA’s major advantage, in my view, is that you can shelter capital gains and make them tax-free. Of course, you may only come to appreciate it once the stock markets settle down and you’re earning capital gains again.
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