The Tax Free Savings Account

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The Tax Free Savings Account
A Gem for Canadian Investors
The most significant change to Canadas Savings
System since the introduction of RRSPs
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Agenda

• Intro
• The TFSA defined and compared
• How itll work
• How to make the most of it
• Applicable Investment Strategies

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TFSA, How popular will it be?

• Most dramatic change since RRSP
• Will revolutionize tax treatment regarding
  investments
• Plan is simple, easily understood by the lay
  person
• Theres no downside

4
TFSA, an RRSP in reverse

• RRSP
• Gives tax deduction for contribution, But
• Makes all withdrawals taxable
• TFSA
• Offers no deduction for deposits, But
• No tax imposed on investment returns

5
TFSA defined

• Tax exempt savings account
• Contributions not tax deductible
• Annual Max 5 K regardless of RRSP/RPP contrib.
• Indexed to inflation in 500 multiples
• Unused contribution room can be carried forward
• Account growth turns into contribution room
• Over-contributions are penalized

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TFSA defined (contd)

• Investment earnings not subject to income tax
• Amounts can be withdrawn at any time
• Withdrawals are added back to total contribution
  room.
• It does not affect federal income-tested benefits
  and credits (OAS, GIS).
• Contributions to a spouses TFSA are allowed,
• Transferable to the TFSA of spouse upon death,
  tax-free.

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TFSA results

• Combined federal and provincial tax savings
  based on a 200 monthly contribution for 20 years
  and a 5.5 per cent rate of return. For
  unregistered savings, a 21 per cent average tax
  rate on investment income is assumed (based on 40
  per cent interest, 30 per cent dividends and 30
  per cent capital gains, and a middle-income
  earning account holder)

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TFSA or RRSP?

• At first glance, No definite answer

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TFSA or RRSP? A closer look

• Real difference is in the tax consequences
• M.T.R. when contributing vs. M.T.R.
  when withdrawing.
• Use of the tax refund.

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TFSA or RRSP? M.T.R. comparison

• If projected retirement income or M.T.R.
• Lower than current income RRSP
• Similar to current income TFSA or RRSP
• Higher than current income TFSA
• TFSA beats RRSP
• Maximize contribution in low MTR years
• TFSAs nature free of any clawbacks from federal
  tax credit and benefit programs.
• Ideal for Emergency fund / to finance consumption

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TFSA or RRSP? Savings objective

• A withdrawal of 200 for a specific short term
  need (e.g. remodel the house)
• From TSFA
• 200 tax-free
• can be re-contributed without affecting room
• From RRSP savings
• need to withdraw up to 370 to pay taxes
• contribution room is lost.

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Appeal of TFSA RRSP mix

• Flexibility / ability to decide, year-by-year
  basis, whether or not to pay tax on
  withdrawals
• Some years, keep taxable income down,
  to minimize clawback of government
  benefits
• Other years, want taxable income,
  to use up losses or for other
  reasons
• Having a TFSA and an RRSP will make good sense.
  It's all about flexibility later.

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TFSA, How much? Who?
How much will Canadians contribute? 20 billion in
2009 Who will contribute?
Budget assumption 2/3 by
low-income Canadians UK experience
50 of high-income individuals 30
lower income UK citizens. Individuals
over age of 55 have the higher tendency to
contribute to the ISA.
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TFSA, Where will the money come from?

• Over 40 of Canadians likely to use new money
• Very significant for younger generations

UK's ISA MarketBy Age and Income and Growth
Pattern
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Appeal Versatility / RRSP companion

• 40 of workers in RPP
• Compensation for the P.A. that limits RRSP
  contributions.
• High earners
• A welcome addition to RRSP contribution room
• Seniors
• Additional savings device free of tax to
  continue saving beyond cut-off age of 71 for
  making RRSP contributions
• Low-income individuals
• Who contribute to an RRSP- Success limited
  at best
• Ideal for immediate needs
• Emergency funds / tax efficient way for
  Canadians to finance consumption.
• Estate Planning
• Assets can be transferred tax free without
  affecting the recipients contribution room

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Appeal(contd)
The data gathered between April 30th and May 5th,
2008. Sample size 2,613.
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TFSA Asset Allocation Decision

• How much of a benefit you'll get from tax
  sheltering provided
• Marginal tax rates on investment income ('07 tax
  year)
• B.C. resident making 50,000 per year
• Interest income 30.7
• Capital gains 15.3
• Ontario resident making 100,000 per year
• Interest income 43.4
• Capital gains 21.7
• Nova Scotia resident making 150,000 per year
• Interest income 48.3
• Capital gains 24.1
• SOURCE ERNST YOUNG TAX'S ONLINE 2007 PERSONAL
  TAX CALCULATOR

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TFSA Asset Allocation Decision

• Can shelter any investment held in an RRSP
• Time horizon
• Long term Equity holdings
• Higher ROR tax free
  compounding
• Short term Income paying holdings
• Minimize fluctuations in value
• Interest income 100 tax free
• Investment Objective

Recommendation A well diversified portfolio TFSA
losses mean an absolute loss of precious
contribution room
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Maximize TFSAs benefit

• Post-retirement tax shelter
• RRIF MAP to TFSA when income is not needed.
• Assets will continue to grow tax free until
  withdrawn
• Partially replaces Universal Life Insurance
• RESP replacement
• TFSA eliminates all the restrictions and
  potential penalties
• Dont borrow to invest
• Interest payments are not deductible
• As loan collateral

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Maximize TFSAs benefit

• Contribution in-kind from an open account.
• File a tax return, even if you dont have to pay
  tax
• TFSA within an investment plan
• Retirements MTR higher maximize TFSA
  contribution
• Retirements MTR lower
• supplement maxed-out RSP contribution
• otherwise use for other saving goals (i.e
  emergency fund)
• Income-splitting
• No attribution rules apply to the investment
  income earned.
• As the years pass and the contribution
  entitlement builds,

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TFSA _at_ CI Investments

• Prepared to compete
• All Mutual funds / Corporate Class funds
• Income solutions Portfolio Series are
  particularly appealing
• Portfolio Select Series 5,000 transfers /
  deposits
• T-Class
• SunWise Elite Plus Gteed Tax-free Income for
  Life