TFSA boon to first-time homebuyer

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TFSA Boon to First-Time Homebuyer

• Westhill British Columbia

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• In just a months time, the tax-free savings
  account will be celebrating its fourth birthday.
  Since the launch of the TFSA in 2009, Canadians
  have embraced this new, tax-assisted savings
  program with approximately 8.2 million Canadians
  having opened an account and roughly 2.5 million
  Canadians contributing the maximum amount in
  2011.

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• Beginning Jan. 1, Canadians will be able to
  contribute an extra 500 annually to their TFSAs
  as a result of the annual limit increasing to
  5,500 for 2013 from 5,000. This is as a result
  of the rounding mechanism originally established
  with the introduction of the TFSA, which has the
  initial 5,000 annual contribution limit indexed
  to inflation using CPI data, rounded to the
  nearest 500.
• For someone who has never opened a TFSA and was
  at least age 18 in 2009, that means your total
  cumulative TFSA contribution room starting Jan.
  1, 2013 will be 25,500, which poses an
  interesting opportunity for younger Canadians
  looking to finance the purchase of their first
  home.

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• Traditionally, before the advent of TFSAs,
  younger Canadians, myself included, looking to
  save for retirement while at the same time save
  enough money for a down payment toward a first
  home, turned to the federal Home Buyers Plan.
  The HBP allows a first-time homebuyer to withdraw
  up to 25,000, tax-free from their RRSP and repay
  that amount, interest-free, in equal instalments
  over 15 years. Failure to make timely, annual HBP
  repayments to your RRSP causes the amounts not
  repaid to be included in income for that year.
• But for Canadians in the lowest tax bracket and,
  in particular, for young Canadians with newly
  launched careers, RRSPs may not be the most
  effective route to retirement savings. Thats
  because with an RRSP, you get a tax deduction at
  a low rate because youre in the lowest tax
  bracket due to your earnings. Later, however,
  perhaps on retirement, you may end up pulling the
  money out at a much higher effective marginal tax
  rate.
•  

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• The TFSA solves this problem by allowing you to
  pay tax on your employment or business earnings
  at your current tax rate, which could be low, use
  some of those after-tax funds to contribute to a
  TFSA, and then withdraw the funds tax-free later
  in life, when you may find yourself in a higher
  tax bracket.
• With the cumulative limit of 25,500 now slightly
  eclipsing the HBP maximum withdrawal amount of
  25,000, young Canadians who are in a low tax
  bracket and who want to save toward a down
  payment on a first home are now able to save and
  withdraw the same amount they could have done had
  they participated in the HBP.
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• The added benefit is that the TFSA withdrawals
  can be repaid to the plan at any time, beginning
  with the calendar year following the year of
  withdrawal. And, unlike HBP repayments, failure
  to repay amounts withdrawn from a TFSA never
  result in tax on funds not repaid.
• Jamie Golombek is the managing director, tax
  estate planning at CIBC Private Wealth Management
  in Toronto.