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Great things you can do with your TFSA

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Deposit Photos

By Mark Seed, myownadvisor

Special to Financial Independence Hub

A Tax Free Savings Account (TFSA) is far more versatile and powerful than you might think.

Now that we’re into the start of a new year (Happy New Year!) here are some great things you can do with your TFSA.

TFSA Backgrounder

The TFSA was first introduced in the 2008 federal budget.

It became available to Canadians for the 2009 calendar year – as of January 1, 2009. Launched part-way through The Great Recession (where markets collapsed significantly during 2008 triggered by a financial crisis), the account was designed as a savings account (hence the name) to encourage Canadians to save more money.

But the “savings” word in the name is very misleading, no?

Correct. 

Since account introduction in 2009, adult Canadians have had a tremendous opportunity to save and grow their wealth tax-free like never before.

While this account is similar to a Registered Retirement Savings Plan (RRSP) there are some notable differences.

As with an RRSP, the TFSA is intended to help Canadians save money and plan for future expenses. The contributions you make to this tax-free account are with after-tax dollars and withdrawals are tax-free. Consider it like an RRSP account in reverse.

For savvy investors who open and use a self-directed TFSA for their investments, these investors can realize significant gains within this account. This means one of the best things about the TFSA is that there is no tax on investment income, including capital gains!

How good is that?!

Let me tell you … here is summary of many great account benefits:

  1. Capital gains and other investment income earned inside the account are not taxed.
  2. Withdrawals from the account are tax-free.
  3. Neither income earned within a TFSA nor withdrawals from it affect eligibility for federal income-tested benefits and credits, like future Old Age Security (OAS) income.
  4. Anything you withdraw can be re-contributed in a following year, in addition to that year’s contribution limit.
  5. While you cannot contribute directly as you could with an RRSP, you can give your spouse or common law partner money to put into their TFSA. Do it without any income attribution!
  6. TFSA assets could be transferable to the TFSA of a spouse or common-law partner upon death. More details below for you.
  7. The annual contribution limit is indexed to inflation in $500 increments, that happened in recent years …. and more!

I’ve got my preference for which account I focus on for wealth-building purposes (related to the RRSP vs. TFSA debate, including what account I would suggest you max out your contributions to first) but let’s compare each first:

RRSP

TFSA
A tax-deferral plan. A tax-free plan.
Contributions can be made with “before-tax” dollars as part of an employer-sponsored plan or “after-tax” dollars when a contribution is made with a financial institution. Contributions are made with “after-tax” dollars.

 
Contributions are tax deductible; you will get a refund roughly equal to the amount of multiplying your contribution by your tax rate. Contributions are not tax deductible; there is no refund to be had.
If you don’t contribute your maximum allowable amount in any given year you can carry forward contribution room, up to your limit.
If you make a withdrawal, contribution room is lost. If you make a withdrawal, amounts withdrawn create an equal amount of contribution room you can re-contribute the following year.
Because contributions weren’t taxed when they were made (you got a refund), contributions and investment earnings inside the plan are taxable upon withdrawal.  They are treated as income and taxed at your current tax rate. Because contributions were taxed (there was no refund), contributions and investing earnings inside the account are tax exempt upon withdrawal.
Since withdrawals are treated as income, withdrawals could reduce retirement government benefits. Withdrawals are not considered taxable income.  So, government income-tested benefits and tax credits such as the GST Credit, Old Age Security (OAS) and the Guaranteed Income Supplement (GIS) aren’t affected by withdrawals.
You can’t contribute to an RRSP after age of 71. Accounts must be collapsed in the 71st year. You can contribute to a TFSA after age of 71.
The Summary:  part of your RRSP is borrowed money (i.e., you owe the government taxation.) The Summary:  all of your TFSA is your money.

Based on my personal investment plan, I feel the TFSA ultimately trumps the RRSP as a retirement vehicle to focus on first at any income level even though I contribute to both every year. All the money in the TFSA is mine to keep, grow and manage with no taxation withdrawal consequences.

Since inception, here are the annual and cumulative limits assuming no withdrawals over that period were made:

TFSA contribution limit 2009 to 2025:

Year TFSA Annual Limit TFSA Cumulative Limit
2009 $5,000 $5,000
2010 $5,000 $10,000
2011 $5,000 $15,000
2012 $5,000 $20,000
2013 $5,500 $25,500
2014 $5,500 $31,000
2015 $10,000 $41,000
2016 $5,500 $46,500
2017 $5,500 $52,000
2018 $5,500 $57,500
2019 $6,000 $63,500
2020 $6,000 $69,500
2021 $6,000 $75,500
2022 $6,000 $81,500
2023 $6,500 $88,000
2024 $7,000 $95,000
2025 $7,000 $102,000
Based on the recent bull run in recent years, I know some individuals that have over $200,000 in their TFSAs.

I also know some couples who have their combined TFSA assets worth more than $400,000 in value.

Pretty impressive tax-free money!!

Q&A with Mark – What has worked for me/us over the years?

Well, we’ve bought various assets, namely Canadian stocks and ETFs over the years.

To date, we have avoided any TFSA withdrawals. Instead, like I referenced above, we use our TFSAs for owning equities and wealth-building purposes.

Q&A with Mark – What types of investments can you own inside the TFSA?

Thankfully lots!

Similar to the assets you can hold within a Registered Retirement Savings Plan (RRSP), the TFSA can also be used to help Canadians build significant wealth beyond just holding cash savings. You can own a number of different types of investments inside the TFSA: Continue Reading…

Podcast & Transcript: Tax lawyer Anna Malazhavaya on CRA’s expanded powers and moving to the U.S.

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Anna Malazhavaya/AdvotaxLaw.ca

The following is an edited transcript of an interview conducted by financial advisor Darren Coleman of the Two Way Traffic podcast with tax lawyer Anna Malazhavaya of Advotax Law.

It appeared on September 6th under the title ‘What you need to know about recent tax changes in Canada.’ Advotax is a team of lawyers and tax professionals that serves individuals, businesses and real property owners with tax planning and tax-dispute resolutions involving the Canada Revenue Agency. The discussion explored everything from the capital gains inclusion rate to expanded powers of the CRA to clients asking about moving to the US.

“It’s emotional but for some the increase in the capital gains inclusion rate was the last straw as they choose to leave Canada,” said Anna who added that over four million Canadians hold more than one property which means the government’s claim that this affects only 0.13% of the population isn’t true. “People are calling me every week. The wealthiest, the most talented entrepreneurs, are leaving Canada. It’s very sad to see.”

Anna and Darren talked about this phenomenon and how the June 25th deadline made it more expensive to leave the country with what can be a hefty departure tax. They also got into RRSPs, RIFs, and bare trusts which involve putting your property in someone else’s name. Anna said while the bare trust may have been designed to catch those who are less than scrupulous, it also captures honest people and gave examples.

Here’s a link to the podcast.

https://twowaytraffic.transistor.fm/episodes/what-you-need-to-know-about-recent-canadian-tax-changes

Darren Coleman

I want your perspective and what your clients are thinking about the capital gains change we saw recently, and the deadline for people making changes. Now we’re in the new environment where the inclusion rate, or the amount of money you have to pay tax on, has gone up. And the government told us this was only going to affect 0.13% of taxpayers. Do you think their math was right?

Anna Malazhavaya

I have doubts. I’m not an economist and don’t have access to all the government stats, but I can share some stats. Capital gain may apply on the sale of your property that is not your principal residence. This includes your cottage, and your investment in rental properties.

4 million Canadians hold more than one property

Darren Coleman

More than four million Canadians hold more than one property. So four million Canadians, potentially, may be subject to that new increase capital gain rate. So that’s not 0.13%. That’s more.

Anna Malazhavaya

It’s way more. Of course, if I argued for the other side, I would say, Well, you don’t know how much money these people made on the property, and the first $250,000 of capital gain is still subject to the old rate, and that’s true. But at the same time, something tells me if these people held the property for more than 10 years that gain will be substantial. Look at how the real estate market performed in the last 20 years.

Darren Coleman

A lot of these people will be subject to the new rules. And not only that, think about people who only have one property, and let’s say, live on a farm property, and they have their house. When they sell their property, not the entire sale price will be sheltered by the principal residence exemption, but only the portion that’s required for the maintenance of their farm property. Everything in excess will be subject to capital gain and can potentially be subject to these new higher rates. Do you know how the government arrived at their number? A reasonable solution would have been to look at past taxpayer data and say, if we look at the last five or 10 years, how many taxpayers had a capital gain over $250,000? Let’s average it out over a bunch of years. But that’s not what they did. They looked at one year, 2022, and said only 0.13% of taxpayers had a capital gain of over $250,000. But that was also a negative year for stock markets globally, and a bit of a negative year for real estate equity markets everywhere. Tell me a little more about how your clients are experiencing this change.

Anna Malazhavaya

Until 2022 I probably had five people consulting me about leaving Canada. Normally, it was the other way around. We had all those talented people who wanted to bring their money, settle their life in Canada, educate their children here, build their future, build businesses, hire people. Pay taxes at 54% mind you. But this year alone, I have over a dozen new clients who plan to leave Canada and for my practice it’s a big change. People calling me practically every week, saying, I’m done. You know what? This capital gain game change. It did not affect me today. It probably won’t affect me tomorrow, but it’s the straw that broke the camel’s back.

More Canadians want to leave the country

Darren Coleman

The people who used to hire people, who used to come up with brilliant solutions, making everyone’s life better, they’re leaving Canada. Very sad to see and you’re not alone in experiencing that. I had a conversation this morning with a cross-border tax accountant and he said he’s had a surge of people looking to leave Canada, and he blames it on the tax policies which are making it less attractive for them to be here. Is it easy to just pack up and go to places like Florida?

Anna Malazhavaya

Leaving Canada became a lot more expensive. If you want to leave Canada, you are treated by Canadian law as if you sold all of your assets, even though you’re not selling anything. You keep all your assets. But the government says, Okay, fine, you want to leave Canada, but we want all the tax on the gain that you accrued to date.  Some call it a departure tax, although this isn’t an official name, but it can hit you hard if you decide to leave Canada. So you have to declare all the gain you had from all your assets. Continue Reading…

Darren Coleman interviews Tax expert Kim Moody about Liberals floating tax on Home Equity

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Darren Coleman (left) and Kim Moody (right, with glasses).

The following is an edited transcript of an interview conducted by financial advisor Darren Coleman’s of the Two Way Traffic podcast with tax expert Kim Moody, of Moody Private Client. It appeared on August 8th: click here for full link.

Moody recently wrote an article in the Financial Post about the government flirting with the idea of a home equity tax, even on principal residences. Such a tax could result in an annual levy of about $10,000 for a home worth $1 million. He described that, along with the increase in the capital gains inclusion rate that has already passed into law, “really bad tax planning” based on ideology, not economics.

In the podcast Moody and Coleman also discussed …

  • The disparity between U.S. and Canadian tax rates, beginning with how the state of Florida compares with Ontario, a difference of 17%.
  • The tax model established in Estonia lets you reinvest in your company without paying corporate tax while personal income is taxed at a flat rate of 20%. They say such a system would work in Canada, and celebrate success and entrepreneurship.
  • What organizations like the Fraser Institute and mainstream economists think about Canada’s economic performance.

Below we publish an edited transcript of the start of the interview, focusing on the capital gains inclusion rate and trial balloon about taxing home equity.

Darren Coleman, Raymond James

Darren Coleman:  I’m Darren Coleman, Senior Portfolio Manager with Raymond James in Toronto.  I’m delighted to be joined by Kim Moody of Moody’s tax and Moody’s private client. You’re also a law firm based in Calgary, Alberta, and probably one of Canada’s best known tax and estate planning advisors. You may have heard our last conversation with Trevor Perry  about some of the issues we might be seeing in terms of taxation of the principal residence in Canada.

I think because governments have spent so much money that we’re going to see tremendous innovation in taxation.  Do you want to set the table for the article you wrote in the Financial Post, where you talked about where this is coming from, and why Canadians might be on alert for what might be coming to tax the equity in their homes.

Kim Moody: The point of the piece was mainly just to put Canadians on notice that you had the Prime Minister and the finance minister sitting down with what I call a pretty radical
think tank.  I consider them an ideological bastion of radical thought but that issue aside,
they call them call themselves a think tank, and this particular one, led by Paul Kershaw of
Generation Squeeze, has stuff on their website that pretty much attacks older Canadians:
basically saying they’ve gotten rich by going to sleep and watching TV. Unbelievable. Whoever approved that, it’s just so offensive. But that issue aside,  the whole connotation of the messaging is that, hey, these people are rich. We’ve got these poor young Canadians who are not rich and they can’t afford houses because you’re rich and …

Darren Coleman Someone should do something about it, right? That’s the trick.

Kim Moody

Kim Moody: Someone should do something about it. And their solution is to introduce a so-called Home Equity tax on any equity of a million dollars or more. And they call it a modest surtax of 1% per year. So it’s like another, effectively property tax … It’s just so nonsensical and so offensive on a whole bunch of different levels. Like you think about grandma and grandpa, yeah, they’ve got equity in their homes, but they don’t have a lot of cash. They’ve been working hard their entire lives to pay off their houses. And yes, they want to transfer down to their kids at some point, but right now, they’re living again, and they’re making ends meet by living off their pensions that they worked hard, and you’re expecting them to shell out more money for that, and I find that offensive.

…. Back to the original premise of why I wrote the article:  to let Canadians know that our leaders are entertaining stuff like this. It doesn’t mean they’re going to implement it, but they’re actually entertaining radical organizations like this and secondly, just to put Canadians on
notice that this is just the beginning. If this regime continues with out-of-control spending and no
adherence to basic economics, then we could expect a whole bevy of new taxes.

Darren Coleman  

Indeed, they’ve already done some of this, right? So you know that this idea about we’re going to tax home equity, either through some kind of annual surtax on equity over a certain amount, or we’re going to put a capital gain on principal residences. And I would argue that for years now, Canadians have had to report the sale of the principal residence on their tax returns, which is a non-taxable event, yet you now have to tell them, and if you don’t, there’s a penalty. Continue Reading…

Retired Money: In Semi-Retirement, reducing stress may be more important than generating extra taxable revenue

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Pexels: Amir Ghoorchiani

My latest MoneySense Retired Money column looks at the trade-offs between leisure time and using time to generate extra but taxable revenue. Early in one’s career, there’s little choice but to generate taxable revenue but Semi-Retirement has a different dynamic. Find the full column by clicking on the highlighted headline: Is semi-retirement stressful? You bet — here’s what to do about it.

One of my philosophies of Semi-Retirement is the principle that reducing stress can sometimes be more important than maximizing revenue. Assuming you are self-employed in Semi-Retirement, as I am, you may find yourself juggling multiple clients and conflicting demands on your limited time and energy.

Given the sporadic nature of freelancing, most freelancer writers or suppliers know how hard it is to turn down paying work. I was like that in my first stint at freelancing, back in the 1980s: long before I achieved a modicum of financial independence.

This time around, I have the luxury of being able to pick and choose. I’ve even stated this boldly to some clients: “My goal these days is to minimize stress, not to maximize taxable revenue.” Another way to look at this is the age-old dilemma of time versus money. It’s been years since I read the classic book on financial independence, Your Money or Your Life (by Vicki Robin and Joe Dominquez); however I’ve never forgotten their core message that time is life energy. When we earn money we do so by exchanging our time or in effect giving up some of our life energy.

There comes a time it’s time to say “Enough” to further expenditures of Life Energy

So it follows that if you have accumulated enough money after working a lifetime to accumulate it, then at some point it may be necessary to stop and say “enough!” when it comes to requests to expend still more of your life energy.

True, not everyone in Semi-Retirement is self-employed and enjoys the flexibility to make these trade-offs. More likely though, a semi-retired person is self-employed or working part-time on one or two gigs, while simultaneously collecting some combination of Government benefits, employer pensions, and investment income. The more secure those passive sources of income are, the less you may feel compelled to take on extra work requiring your time and life energy. Continue Reading…

CRA can now compel Oral Interviews

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By Anna Malazhavaya

Special to the Financial Independence Hub

I  never met anyone who said they enjoyed being interviewed by an auditor with the Canada Revenue Agency. For sure, CRA audits can be stressful and disruptive to a business, but this is the price we pay to maintain the integrity of our tax system. The CRA’s audit powers are already quite broad and now they are about to expand even further. Anyone who must file a tax return in Canada (and, therefore, can be audited) should pay attention.

The 2021 Federal Budget announced on April 19th includes a proposal that gives CRA officials a new power to compel oral interviews of “persons.” This means you, me, your employee, your neighbour and virtually anyone else who may have information relevant to determining and enforcing someone’s Canadian tax liability.

The current rules

How are the proposals different from the existing rules? The CRA already wielded the power to examine taxpayers’ documents or property that may be relevant to determine one’s tax obligations. As the CRA examines the documents or property, they have the power to ask questions about the documents or property. However, there is no general power for the CRA to compel oral interviews. In practice, this meant CRA auditors still used oral interviews when conducting selected types of audits, but it didn’t happen often.

In fact, a good portion of CRA audits were handled without much face-to-face interaction at all between auditors and taxpayers and/or their employees. Taxpayers’ authorized representatives, which means accountants and tax lawyers, handled most of the audit “heavy lifting” on behalf of their clients: they attended on-site meetings, had phone calls, answered questions, and provided documents. Taxpayers generally had the opportunity to answer the auditor’s questions in writing. This means that people had time to review their records, consult with their representatives, and keep a record of their specific answers. This trend of written audit questionnaires has become more pronounced during the COVID-19 pandemic as the CRA auditors tried to minimize in-person contact with taxpayers for safety reasons.

What prompted the Federal Budget change?

The most likely cause of the proposed change is a two-year-old Federal Court of Appeal decision in MNR v. Cameco Corporation (2019 FCA 67). On its website Cameco calls itself “one of the largest global providers of the fuel needed to energize a clean-air world.” That fuel is uranium. Based in Saskatoon, Saskatchewan, Cameco has offices in Canada, the United States, Switzerland, Kazakhstan, and Australia.

As part of the audit of Cameco, the CRA asked upwards of 25 employees of Cameco (including those of foreign subsidiaries) to attend oral interviews.

Notably, that was the CRA’s second time requesting to interview Cameco’s employees. The first came as part of another, earlier audit and Cameco complied with the earlier request. Later, it found that the auditor’s notes of the interview differed from the recollections of Cameco employees. The dispute over results of that earlier audit was about to reach the Tax Court of Canada.

So, when the CRA asked for oral interviews again during a subsequent audit, Cameco refused, offering to provide only written answers. Cameco argued that the CRA has no general power to compel oral interviews. Cameco was concerned that the oral interviews can prejudice the upcoming Tax Court litigation relating to the previous audit.

The CRA brought an application seeking a compliance order first to the Federal Court, and then to the Federal Court of Appeal. Both those courts sided with Cameco, stating that the CRA had no general power to compel oral answers to its questions. Fast forward to 2021, and the Federal Budget proposes to override the Cameco decision.

What’s next?

 If the proposal is adopted, we will see more oral interviews with CRA auditors and the scope of interviews will be much broader. Of course, it’s too early to tell exactly how the CRA plans to use its newfound powers, but the following concerns are already obvious:

First, taxpayers’ answers during oral interviews can expose them to penalties or criminal prosecution. There are several tax rules where the taxpayer’s experience, knowledge of certain information, or taxpayer’s intentions are important. Some questions may trick you into admitting something that it is not entirely true, but your answer can later be used to impose penalties or even initiate criminal proceedings. Continue Reading…