Federal Budget: The new TFSA… and the rest

What’s of interest in the latest Flaherty budget? The new Tax-Free Savings Account, the TFSA? The measures are not as spectacular as in recent years, but still, they will make some people happy.

If previous federal budgets were very good for some groups of taxpayers (notably the middle class), we might say that this one is good for everyone… in a smaller way.

The TFSA
The Tax-Free Savings Account (TFSA) is the most notable new measure. Its real impact remains to be seen, since it opens the door to a range of possibilities.

This is an account that allows your money to grow, with the advantage that it can be withdrawn as you wish, at any time, completely tax free. Unlike the RRSP for retirement or RESP for education, the TFSA can be used for anything. The following table outlines the mechanics of the TFSA.

The TFSA is a tax-free plan, while the other registered plans are tax-deferred. What difference does that make? In terms of net return compared to an RRSP, none. The table below shows why.

The TFSA is another way of… saving the same money. It’s a sort of “RRSP for everything else”. However, the specifics of how it’s used will determine its true usefulness. Note, for instance, that:

• Financial institutions will probably apply administration fees – it will be important to ensure that these fees don’t eat up too much of the returns and to choose one’s investments carefully;
  
• Since investment income earned in a TFSA is completely tax free, we can imagine that it will be beneficial to use this account to hold investments that provide returns in the form that is the most heavily taxed;
  
• A TFSA could be used as another tool for splitting income between spouses, with no income attribution rules;
  
• High-income taxpayers who already maximize their RRSP contributions could use a TFSA to effectively increase their annual contribution room by $5,000;
  
• Households that want to set up an emergency fund or save for a major purchase will be able to do so without having taxes erode their savings;
  
• A withdrawal from a TFSA would free up the equivalent contribution room:  if you took out $2,000, you would have the right to replace it in the future; this is not the case with an RRSP;
  
• During retirement, withdrawals from a TFSA will not affect Old Age Security benefits, unlike other forms of retirement income;
• After death, assets from a TFSA could be transferred to the surviving spouse’s TFSA completely tax free.

We have nine months to get to know the TFSA better. That will give us enough time to assess all the possibilities and implications!

Other than the TFSA…

The announcement of the TFSA overshadowed other items in the budget that are nonetheless important for many people. Here are the main ones:

• RESP
• in the future, it will be possible to keep an RESP open for 35 years (currently 25 years)
• contributions will be allowed for 31 years (currently 21 years)
  
• Student Grant
  A new grant program is to be established, along with programs to encourage excellence at the PhD level and for studies abroad. The budget also extends the tax credit for textbooks, which is $65 per month of full-time study at a college or university, to a maximum of $520 a year.
  
• Medical expenses
• The list of expenses that qualify for the medical expenses tax credit has been expanded.
• Training courses that help people to deal with a disorder or disability will be exempt from GST or HST.
  
• Retirement income
• Seniors who take jobs to supplement their income can now earn up to $3,500 without affecting their Old Age Security benefits.
• Rules for withdrawals from federal life income funds have been relaxed.
  
• Business owners
  The accelerated depreciation rules have been extended to 2011.
• Taxes on dividends
  The dividend tax credit is adjusted so that taxpayers who receive dividends will pay more tax on this income.
  
• Rebate of $1,000 to $2,000 on the purchase of a fuel-efficient vehicle
  Anyone who wants to take advantage of this program had better do it now:  it’s about to be discontinued. Only 2008 models still qualify.
  

It would appear that huge tax cuts from Ottawa are a thing of the past, at least until the economy picks up again. It must be said that the past few years have been generous:  the 2% reduction in the GST alone has meant that buying a new $200,000 house costs $4,000 less than it would have two years ago. And that’s without factoring in the lower income taxes, which have put thousands of dollars directly into the pockets of Canadian households.

So the party’s over… but we still have the TFSA and a few other things.

In collaboration with Desjardins Financial Security Independent Network.
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