Invest With Advice / Tax Considerations
Tax Considerations
For most people, tax is the largest controllable drain on wealth. Many of the strategies are straight forward yet do require a little effort to put into place. Remember also that there are usually simple alternatives to complex strategies that can result in modestly higher tax payments but lower costs and greater flexibility. Maximizing your RRSP and TFSA contributions, paying down non-deductible debt, and ensuring that the fixed income portion of your total portfolio is in your registered accounts are just a few of the basics, but they are often overlooked. This page will be updated periodically to include strategies that contribute to a tax efficient portfolio.
TFSA
Canadian residents age 18 or older are eligible to open a Tax Free Savings Account. You can contribute $5,000 per year; beginning 2009 (the TFSA dollar limit will be indexed to inflation and rounded to the nearest $500 in later years). Unused contribution room can be carried forward to future years. Any amounts withdrawn will also be added to contribution room in the following year. Each year, the government determines and advises individuals of their TFSA contribution limits for that tax year. Investment income (including capital gains) earned in a TFSA is not subject to tax however, contributions to a TFSA cannot be deducted for income tax purposes. If you over contribute to a TFSA the Canada Revenue Agency will charge a penalty of 1% per month based on the actual monthly over-contribution amount. Also be careful about transferring assets from other non-registered accounts. The investments transferred are deemed to have been disposed at fair market value. This may trigger a capital gain which would be taxable and reported on an individual’s income tax return. If a capital loss is triggered, the loss may be denied under the superficial loss rules.
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