Tax Free Savings Accounts

Where You Live is Important to the Estate Planning of a Tax Free Savings Account.

There is a lot of interest in the new Tax Free Savings Accounts (TFSA). Basically, it is very similar to having a Retirement Savings Plan (RSP) because investment income and capital gains are tax free. However, you do not get a tax deduction for the contribution and there is a much lower contribution limit for a TESA than for an RSP.

You must be over the legal age of 18 and a Canadian resident with a valid Social Insurance Number to be a holder of a TFSA.

For 2009 the maximum contribution you can make to this new registered plan is $5000. Each year, that amount will be adjusted by the inflation rate and rounded to the nearest $500. That may seem like a small sum, but you can effectively build a tax free wealth over time that will be of great value to your heirs. Unused contribution room from the previous year carries over and withdrawals from the previous year will also be added to your contribution room. Your annual contribution room will be indicated on your notice of assessment issued by CRA.

If you withdraw funds from the TFSA unlike the RSP or RIF there are no tax implications to your income. For seniors, this is an important feature because withdrawals will not affect your benefits such as the Guaranteed Income Supplement or clawback of your OAS.

Presently, in the province of Newfoundland and Labrador, you cannot elect a successor holder or designate a beneficiary directly without addressing this account in your will. This means that the assets of your TFSA must be included in the estate’s assets when applying for probate. The provinces of BC, Alberta and PEI, have approved the naming of a successor holder and therefore it avoids the inclusion of those assets when calculating the probate tax.

The passing on of a TFSA is a new consideration in estate planning so it is important that you review your will in the light of current provincial rules.