Recently, I answered a wide range of questions on Tax-Free Savings Accounts on CTV's Canada A.M. and two popular phone-in radio shows: Dave Rutherford on CHQR AM770 in Calgary and Jim Smalley on CKRM AM620 in Regina. I came away with the strong impression that while there is a lot of interest in the new plans there is also a great deal of uncertainty and misunderstanding about how they work. Therefore, I thought it might be useful to publish some of the questions here as I suspect many readers may also be wondering about the same things as the viewers and listeners to those shows.
Q - Can I transfer funds from my RRSP to a TFSA?
A - This question came up a couple of times. The answer is no and if you think about it a moment the reason is obvious. RRSP contributions generate a tax deduction. The offset is that you pay tax when the money comes out of the plan. TFSA withdrawals are tax-free. So if you were allowed to shift money from an RRSP to a TFSA, you would end up having a deduction going in but paying no tax coming out. The government is in a generous mood these days, but not that generous.
Q - Is a TFSA for higher or lower risk investments?
A - Either. It depends on personal priorities. It can be used as an emergency fund, in which case such low-risk assets as a savings account or a money market fund are appropriate. At the other end of the scale, a TFSA can be used to maximize long-term growth, in which case higher-risk stocks or equity mutual funds can be used.
Q - Can I transfer my Canada Savings Bonds to a TFSA?
A - Yes. However, surprisingly, the CSB program itself does not offer a TFSA. The bonds would have to be placed in a self-directed plan set up at a financial institution or a brokerage firm. Remember that all accrued interest up to the time the CSBs go into a TFSA is taxable.
Q - If I deposit $5,000 now and earn $200 inside the plan this year, does that put me in an overcontribution position?
A - No. Profits made within a TFSA are not considered to be "contributions."
Q - Is a TFSA a good option for a retiree?
A - Yes. Although they work best for young people because of the many years of compounding they will have, older people can certainly use them to good advantage. Since RRSP contributions are cut off at age 71, TFSAs are the only low-cost way to tax-shelter future investment earnings.
Q - Can you trade stocks in a TFSA?
A - Yes, providing you set up the right kind of plan. Just as with RRSPs, there are several different types of TFSAs being offered. For stock trading, open a self-directed plan. To minimize costs, use a discount broker or choose a fee-based account with a full-service broker. The annual fee should not exceed 1 per cent of the plan's value.
Q - The federal government won't tax TFSA withdrawals, but what about the provinces?
A - The plan was announced in the February, 2008, budget. Since then, no province has said it would not honour the tax-free withdrawal provisions. Of course, anything is possible in the future but for now this does not appear to be a concern.
Q - Is there any limit on how much tax-free profit I can make in a TFSA?
A - No.
Q - What happens to the money in my plan if I die?
A - That's a little complicated. The federal law makes provision for one spouse to designate the other as "successor account holder". However, succession laws are a provincial responsibility and thus far only B.C., Alberta, and P.E.I. have passed the enabling legislation. If you live in another province, the safest course is to name a beneficiary in your will.
Q - I have a $25,000 GIC maturing soon. Can I take the money and open TFSAs in five different banks and contribute $5,000 to each?
A - Nice try, but no. You can have as many plans as you like but the total contribution allowed in 2009 is $5,000 per person. So if you open five plans, you could only contribute $1,000 to each.
Q - I have nine children. Can I open a TFSA for each of them?
A - Only for the ones who are 18 or older. The younger ones will have to wait. (It turned out the caller has two children that qualify.)
Q - Can I make a TFSA contribution in kind by, for example, transferring stocks (or bonds) of up to $5,000 in value from a non-registered account to a TFSA?
A - Yes, contributions in kind are permitted. However, be careful not to transfer a losing security into a plan. If you do, you will not be able to claim a capital loss. Any capital gain that is triggered will be taxed, however.
© 2007 The Globe and Mail. All rights reserved.
