Taxation of Investment Income Tax Free Savings Account

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Taxation of Investment Income Tax Free Savings
Account

• 4th Tax Planning for the Wealthy Family Course
  Feb. 26, 2009
• Presented by Mimi C. Tang, CFP, CLU CHFC,
  Investment Advisor

Mimi Tang Wealth Mgmt. Consulting Ltd.
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Mimi Tang Wealth Mgmt. Consulting Ltd.

• Mimi C. Tang, CFP CLU CHFC
• President

Mimi Tang offers financial planning and insurance
services as an independent Representative, under
Mimi Tang Wealth Mgmt. and Consulting Ltd. and
these Services are offered independently of Peak
Securities. Mimi Tang is an Investment Advisor
for Peak Securities Inc. Peak Securities
Inc., An IIROC (formerly known as IDA)
registered, full service investment broker,
limits its responsibilities to Investment
products such as stocks, bonds, and mutual
funds. Peak Securities Inc. is a member of the
Canadian Investor Protection Fund.
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Mimi Tang Wealth Mgmt. Consulting Ltd.
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WELCOME

• Why are you here today?
• How did you accumulate your wealth?

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Agenda

• Planning
• Types of Investments
• Factors that Influence those Investments
• Tax Free Savings Account (TFSA)

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5,000 Ferrari Loan
Source www.carforums.net/.../pictures/Ferrari10.j
pg
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WEALTH is a Result of

• Planning
• Self-discipline
• Hard Work
• Perseverance

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Think Grow Rich

• Anybody can wish for riches, and most people
  do, but only a few know that a definite plan,
  plus a burning desire for wealth, are the only
  dependable means of accumulating wealth.

Napoleon Hill
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Questions to consider?

• How do we plan ?
• What are various types of investment income?
• What are the tax treatments?

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Source of Income

• Interest GIC, Term Deposits, Canada Savings
  Bond
• Dividends received from Canadian corporations
• Capital Gains gain on any stock, real estate,
  etc.

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After-Tax Income on 10,000

• Source of Income Inclusion Income
  Reported Tax After Tax Income
• Rate on Tax Return
  Payable(MTR40)
• --------------------------------------------------
  --------------------------------------------------
  ------------------
• Eligible Cdn 145 14,500
  2,500 7,500
• Dividend Income
• Interest 100 10,000
  4,000 6,000
• Capital Gain 50
  5,000 2,000
  8,000

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Top Dividend Payers in the TSX as of January 23,
2009
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Trivia?

• In BC, how much can someone earn in 2008 of
  eligible dividend and not have to pay income tax
  if there is no other source of income?

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70,000
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Ex 2008 Eligible Dividends received 48,276

• Taxable Div. (48,276x145) 70,000
• Federal Tax (37,885x15)
  5,683
  over (32,115x22)
  7,065
• Total Federal Tax 12,748
• Less Non-refundable tax credit
• Basic Personal Amt. 1,440
• Federal Dividend Tax CR 13,276
  -14,716
• Total Tax Payable 0
• (9,600x15)
• (70,000x18.9655)

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Mimi Tang Wealth Mgmt. Consulting Ltd.
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BC Personal Tax Rate TableFed. Prov. Marginal
Tax Rates

• 2009 38,833 to over
• Taxable Income 71,433 126,265
• Salary 29.7 43
• Interest 29.7 43
• Eligible Dividends 0 19.9
• Capital Gains 14.9 21.9

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Foreign Income

• Interest or dividend income from another country,
  is reported as income in CDN
• If foreign taxes are paid on interest or dividend
  income, foreign tax credit maybe claimed
• Foreign income is treated like interest income
  100 taxable

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Capital Gains

• Calculate capital gain or loss
• Proceeds of disposition
• minus Adjusted Cost Base (ACB)
• minus outlays expenses incurred to
  sell your property.
• __________________________________________________
  ________________________
• Capital Gain or Loss

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Market Crises

• Current economic crisis
• US sub-prime
• 1987 Market Crash
• Asian Financial Crisis
• 911 Terrorist Attack
• More crisis to come
• Markets will continue to return to their true
• Value over time.

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Black Monday, October 19, 1987

• DJIA tumbled 508 points or 22.6
• One trillion of US stock market value was wiped
  out
• In less than two years, stocks returned to their
  pre-crash summer 1987 highs

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Asian Financial Crisis, October 27, 1997

• DJIA plunged 554 points or 7.2
• Less than 127 days (March, 1997)
• Markets recovered

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September 11, 2001 Black Tuesday

• DJIA suspended trading for four days
• Resumed trading Sept.17, 2001
• Dropped 684.81points, closed 8920.7
• November 2001 less than 50 days, markets
  recovered

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Warren Buffet

• Be fearful when others are greedy and be greedy
  when others are fearful.

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Tax-Free Savings Account

• Effective January 1, 2009

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TAX-FREE SAVINGS ACCOUNT (TFSA)

• Available to Canadian residents, 18 years or
  older (with no upper limit)
• Annual contribution limit of 5,000
• Contributions not tax-deductible
• Excess contributions subject to tax 1 per month
• Unused contribution room can be carried forward
  indefinitely

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TFSA Contribution Limit after 2009

• After 2009, the annual TFSA dollar limit will be
  indexed to the inflation rate.

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Contribution to a TFSA, 18 year old

• You cannot contribute to a TFSA until 18.
  However, when at 18, you will be able to
  contribute up to 5,000 because this amount will
  not be prorated.

18th


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TFSA Withdrawals

• No tax on withdrawals
• Withdrawals made from a TFSA in the year will be
  added back to the TFSA contribution room at the
  beginning of the following year
• You cannot contribute more than your TFSA
  contribution room in a given year, even if
  withdrawals are made from the account during the
  year.
• you will be subject to a tax of 1 of the highest
  amount in the month, for each month you are in an
  over contribution position.

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TFSA Contribution Room

• Canada Revenue Agency (CRA) will determine the
  TFSA Contribution Room for each eligible
  individual. Your Annual Contribution Room will be
  indicated on your Notice of Assessment.

CRA Notice of Assessment
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Non-Residents of Canada

• Allowed to keep TFSA and not be taxed on any
  earnings in the account or on withdrawals.
• No TFSA contribution room will accrue for any
  year as a non-resident.
• Any withdrawals made during the period as a
  non-resident will be added back to the unused
  TFSA contribution room in the following year.
  However, it will only be available if you resume
  your Canadian residency status.

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Death of a TFSA Holder

• The holder is considered to have received,
  immediately before death, an amount equal to the
  Fair Market Value (FMV) of all the property held
  in the TFSA at the time of death.
• All earnings that accrue after the holder's death
  will be taxable to their beneficiaries.
• A beneficiary will not have to pay tax on any
  payments made out of the TFSA that do not exceed
  the FMV of all the property held in the TFSA at
  the time of death.

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Allowable TFSA Transfers

• Marriage or common-law breakdown
• Transfer upon death of a TFSA holder
• If the deceased holder named their spouse or
  common law as the SOLE beneficiary of the TFSA
• As a result, the spouse or common law becomes the
  successor holder under the plan

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TFSA

• Income and Growth is not taxable!

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TFSA

• Withdrawals
• Not taxable
• Withdrawals can be added to the contributors
  TFSA contribution room for the following year
• Not affect eligibility for federal income-tested
  benefits or tax credits like OAS claw back (above
  64,718)

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TFSA

• Income earned or withdrawn from a TFSA will not
  affect eligibility for federal income-tested
  benefits and credits
• Old Age Security benefits (OAS)
• Guaranteed Income Supplement (GIS)
• Employment Insurance (EI) benefits
• Working Income Tax Benefit (WITB)
• Goods and Services Tax Credit (GSTC)
• Canada Child Tax Benefit (CCTB).

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TFSA

• Who should contribute to a TFSA?
• Holders of Non-Registered Investment Accounts
• Have maximized their RRSP contributions
• Seniors over 71
• Wish to preserve income-tested benefits
• Family member who would like to give without
  being subject to income attribution rules

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No Attribution Rule

• You can give your spouse or common-law partner
  money to contribute to a TFSA without that money
  being attributed back to you. However, all
  contributions they make to their TFSA must not
  exceed their TFSA contribution room.

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Allowable Investments

• Generally, same as those permitted in a
  Registered Retirement Savings Plan(RRSP)
• Mutual Funds
• Securities listed on a designated stock exchange
• Guaranteed Investment Certificates (GICs)
• Bonds
• Certain shares of small business corporations

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In Kind Contributions

• Disposed of property for its FMV at the time of
  the contribution.
• If the FMV is more than the cost of the property,
  a capital gain has to be reported on your income
  tax return.
• However, if the cost is more than the FMV, the
  capital loss cannot be claimed.
• The amount of the contribution will be equal to
  the FMV of the property.

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TFSA, RRSP, Non-RRSP

• TFSA RSP Non-RRSP
• Pre-tax income 1,000 1,000 1,000
• Tax (40) 400 0
  400
• Net Contribution 600 1,000
  600
• 20 years at 5.5 1,151 1,918 707
• Gross proceeds 1,751 2,918
  1,307
• Tax (MTR 40) 0 1,167 0
• Net Proceeds 1,751 1,751 1,307
• Net annual after-tax 5.5 5.5 4
• Assumption one time contribution

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QUIZ
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DONT PUT ALL YOUR EGGS IN ONE BASKET!
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• www.mimitang.ca

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