TFSAs – Could they be any more confusing – again?
On Monday, December 7th, Bill Morneau, the Federal Minister of Finance, announced changes to the TFSA contribution limits for 2016. The good news? 2015 is unchanged.
The window for 2015 contributions to Tax Free Savings Accounts under the new Liberal government sits in early December, remains open for 2015. The $10,000 contribution limit for that tax and calendar year will remain as-is. In 2016, the limit will adjust downward, to its former level of $5,500. Consider 2015 an anomaly, an exceptional year where Canadians who qualify for a TFSA have a bonus year!
The lifetime contribution limit for TFSA is currently sitting at $41,000 ending 2015. For 2009, 2010, 2011 and 2012 the annual contribution limit is $5,000, for $2013 and 2014 the limit is $5,500 and in 2015 the limit is $10,000. In 2016, the lifetime limit will increase by $5,500 to a total of $46,500.
There had been much speculation regarding the Liberals response to the Conservatives’ near doubling of the limit for 2015. The belief was that the increase would be reversed, but the administrative machinations required by the government and financial institutions is more onerous than first thought.
The Liberals will leave the limit for 2015 at $10,000 and return it back to the previous limit of $5,500 for 2016.
Any investments sitting in an unregistered account can be transferred to TFSA to exhaust any unused room to allow these funds to grow tax free. We recommend checking your gains on growth of the investments prior to selling and transferring into the TFSA. Otherwise, you could attract and unplanned tax liability.
If a transfer is made in-kind the current market value is used. If the securities have grown in value, this gain must be declared (unfortunately, losses cannot be claimed) on your next tax return. Consequently, whenever possible deposit directly into a TFSA, and then invest it once it is inside this account.
Key Factors to Know
Since the lifetime limit for a TFSA is now $46,500 for 2016, a two-person household (not counting children since you must be 18 to own a TFSA) that is a total of $93,000 in 2016. $93,000 earning 5% generates $4,650 in income. Shielding that $4,650 from CRA’s taxing ways will save a family $1,890 (@ 40.7% marginal tax rate) in 2016.
Unlike RRSPs, TFSA withdrawals are not taxed at all. The return of capital and the income earned inside the TFSA is not taxed at any time. The principle is that savings are only taxed once.
For RRSP deposits, a matching tax deduction is given so that the deposited income is not taxed. Any earnings inside the plan are not taxed when they occur. However, when the funds are withdrawn, the entire withdrawal is subject to income tax. For RRSPs the deposited capital and the earnings are taxed once, at withdrawal. The initial strategy was based on the theory that the income tax rate would be lower for retired people than employed people, and that the ability to not pay tax along the way would allow for greater capital growth.
The added bonus of the TFSA is that the earned income is never taxed! The capital was taxed when it was earned, so when it’s withdrawn from the TFSA it won’t be subjected to income tax, and the capital gains, dividends and interest earned can ALSO be withdrawn without income tax liability.
The Bottom Line
The new government has kept the $10,000 TFSA limit for 2015 intact. In 2016 your total contribution room is now $46,500
Jeff Devlin, CFP
Elementus Wealth Management Inc.