Investments to hold in a TFSABy Ian Bolduc | November 27 2008 01:43PM
Like the RRSP, the TFSA lets individuals accumulate investment income without a tax impact. In addition, unused contributions are carried forward to subsequent years. However, TFSA contributions are not tax deductible and withdrawals do not trigger penalties, which offers greater flexibility for the use of assets. Amounts withdrawn increase the contribution limit for the following year.
In general, investments eligible for the TFSA – investment funds, guaranteed investment certificates (GIC), listed stocks and bonds, to name a few – are similar to those currently held in RRSPs. The question then becomes which asset class should predominate within a client’s TFSA? From a tax standpoint, fixed-income instruments such as GICs and bonds seem to be the best option, as they often are for RRSPs.
Unlike dividends of Canadian companies and capital gains, interest income does not trigger a tax benefit, because it is taxed at 100% of the individual’s marginal tax rate. That is why it is beneficial for investors to let this income accumulate tax free. Yet some experts say that the higher potential return of equities can be a worthwhile option within a TFSA. In this case, an individual could earn a substantial capital gain without paying taxes.
The TFSA differs from all the other savings tools available on the market in that income earned and withdrawals have no impact on the rights to benefits or income-based federal income credits. This characteristic is an asset for seniors who want to continue to save without reducing their payouts from Old Age Security or the Guaranteed Income Supplement. Similarly, families can set money aside without lowering the Canadian Child Tax Benefit.
Couples are permitted to split their income. An individual can contribute to his or her spouse’s TFSA if the spouse has not reached his/her contribution limit. The attribution rules do not apply, so all income generated from the spouse’s contribution belongs to the account holder rather than the contributor.
At the death of the account holder, the assets of the deceased person can be transferred without penalty to the TFSA of the spouse or the common law spouse without reducing the survivor’s contribution room.
Interest on loans contracted for investment in TFSAs is not tax deductible. Assets held in the TFSA may be used as collateral on a loan.
Tax free savings accounts will be offered by banks, trust companies, brokerage firms and life insurance companies. Individuals can hold more than one account.