Every year I touch base with the editorial board of Fifty-Five Plus to find out what topics in the area of estate planning their readers would be interested in learning more about in the magazine. It seems that tax-saving measures for older Canadians have found the most favour lately and therefore I offer the following.
Tax-free savings accounts
One of the most interesting features of the 2008 budget was the introduction of Tax-Free Savings Accounts (TFSA). Those Canadians who still have savings may contribute up to $5,000 a year starting with 2009. Unlike Registered Retirement Savings Plans (RRSPs), contributions to a TFSA are not tax deductible but the income that accrues in the account is tax free even when it is withdrawn. This income can include any interest, dividends or capital gains that accrue inside of the account.
You will need to contact a financial institution, credit union or insurance company and talk to their advisors in order to register an account with the program. In order to apply, you will need to bring with you proof of your Social Insurance Number and your date of birth.
You can have as many TFSA accounts as you want, so long as you do not contribute more money to all of them together than the total contribution room that is available to you as the owner of these accounts. At the moment you can contribute a total of $5,000 for the calendar year 2009 and in subsequent calendar years the limit will be indexed from year to year in accordance with inflation rates. You are the only person who is allowed to contribute to your own TFSA but there does not appear to be any problem depositing that money you received from your uncle for Christmas so long as the money is yours at the time you deposit it.
If you do not have enough money to contribute the whole $5,000, any unused portion will accumulate from year to year so that in each year the unused contribution room from the previous year will be added to your total contribution room. Any withdrawals that you make from the TFSA in the previous year can also increase your contribution room. The Notice of Assessment that you receive from the Canada Revenue Agency (CRA) after you submit your income tax return will show your unused contribution room as of that date.
You cannot contribute more in a calendar year by making a withdrawal in the same year. You will in fact be taxed at the rate of one per cent on the highest amount in excess of your contribution room limit in any monthly period. (There is an example that follows at the end of this article that illustrates how this works.) This was taken from a government publication provided for the purpose.
You can keep your TFSA if you become a nonresident of Canada and the same tax rules will apply but you cannot accrue any further contribution room during the time that you are a non-resident. If you come back to Canada to reside, any withdrawals from the TFSA during your absence will be added back to your TFSA contribution room.
It is important to note that any income earned in a TFSA or any withdrawal from it will have no impact on the amount of your Guaranteed Income Supplement or your Old Age Security or your Canada Pension Plan payments.
When a TFSA holder dies, an amount equal to the fair market value of all the property held in the TFSA at the time of death is deemed to have been received by the holder immediately before death. Earnings that accrue after the holder’s death are taxable to the beneficiaries and must be included in their income in the year that they are received. The beneficiary will not have to pay tax on any payments made out of the TFSA that do not exceed the fair market value of all of the property held in the TFSA at the time of death.
If a holder of a TFSA has named his or her spouse or common-law partner as the beneficiary of the TFSA, the tax consequences of the death of the holder are deferred to the death of the spouse or common-law partner. These are the same rules that apply to the designation of a spouse or common-law partner in respect of a RRSP. In the case of TFSAs, you can also affect the purpose of designating a beneficiary spouse for a TFSA in your Will, but your Will must leave your entire estate to that spouse or commonlaw partner.
The donation of a TFSA to a charity will have the same benefit as a charitable donation on death so long as the transfer of the monies in the TFSA takes place within a three-year period following the death of the owner of the account. There is no room in this article to provide all the detailed tax rules relating to TFSAs but you can obtain a copy of the rules from the CRA on their website.
There is not a lot of room for any fancy tax planning in respect of a TFSA but you might like to try this. Let us say that you make an investment in the stock market and deposit this investment in your TFSA and, miracle of miracles, the investment increases in value. At the end of the calendar year, you withdraw the original amount invested and the capital gain with it. In the next year, you can utilize the unused contribution room from the previous year created by these withdrawals and add to it another $5,000 for the current year. Of course, this implies that you have a capital gain in your account. I should point out that in the event of a loss there is no capital loss to carry forward if you should lose money on your investments in your account.
Registered Disability Savings Plan
Another tax saving measure with roots in the 2007 budget became available for implementation in 2008. The purpose of the Registered Disability Savings Plan (RDSP) is to permit parents and others who wish to provide for the long-term financial security of an individual with a severe disability with an opportunity to shelter some savings from taxation. Under the Income Tax Act, disability is defined as a “prolonged impairment of a mental or physical function certified by a qualified medical practitioner.”
Senior citizens who have resided throughout their lives with their adult disabled children will look forward to this opportunity to make adequate provision for their disabled adult children after they pass away. Even though only the plan holder can collapse the plan, there was, until recently, the possibility of the beneficiary of such a plan forcing the premature collapse of the plan by rescinding the disability certification. This allowed the beneficiary to gain access to the RDSP savings, which normally would be contrary to the objectives of the plan. The 2008 budget changed the rules so that the mandatory collapse of the plan can only take place when the beneficiary’s condition has been proven medically to have improved to the point where the beneficiary no longer qualifies. If this does take place, the RDSP beneficiary ceases to be eligible for a disability certificate and the proceeds of the plan must be paid out to the beneficiary. Such a collapse could be calamitous to the person who is setting aside the money under a RDSP. Therefore it is recommended only for parents of adult disabled children whose disability if unlikely to improve.
Registered Education Savings Plan
Just when you thought you were going to run out of tuition money for your perpetual student, the government has decided to facilitate the extension of your child’s education by extending the age limit for contribution to a Registered Education Savings Plan (RESP) from the age of 21 to the age of 31. Naturally, to go along with this, you are now allowed to distribute money from the RESP for the student during the same extended period, but there has been an increase to the maximum contribution, which is now $2,500 per annum. The maximum lifetime government grant remains unchanged at $7,200.
When thinking about this subject, it is important to be able to distinguish between the different kinds of pensions. For instance, the Canada Pension Plan (CPP) permits the splitting of a pension payment with a spouse or common-law partner. Both parties need to be at least 60 years old and at least one of the partners must be a CPP contributor. In addition to that, you must have already applied for or be receiving a CPP retirement pension. Your ability to take advantage of this provision may be limited because the split is based upon the number of years that you have been together with your spouse or partner.
In 2006, the federal government introduced new rules which permit pensioners to split what is known as “eligible pension income” for tax purposes. The rule first applied to the 2007 tax year and allowed the splitting of up to 50 per cent of eligible pension income with a spouse or a common-law partner. A common-law partner (either gender) is eligible after one year of continuous cohabitation with you, so that if you spent the 2007 calendar year making a new friend, then in 2008, the two of you can split your eligible pension income, but you need to careful note that the kind of pension income you are receiving is eligible for this treatment.
Essentially, “eligible pension income” includes: (a) income from a Registered Pension Plan. Examples of this type of plan would include government or institutional pension plan. Oddly enough, there is no age restriction to the splitting of this kind of pension; (b) periodic income from a RRSP, a Registered Retirement Income Fund (RRIF), a locked-in RIF or a deferred profit-sharing plan, provided that the recipient is 65 years of age or older. If you receive periodic RRSP income or RRIF income while under the age of 65, it will only qualify as eligible pension income if it was received by you as a result of the death of your spouse or common law partner. You cannot split lump-sum RRSP withdrawals or OAS payments or retirement compensation arrangement income or RRSP, RRIF or DPSP for the benefit of individuals under the age of 65 except as described above in the case of the death of the pension holder.
You will want to split enough pension income for your spouse so that both of you can enjoy the full amount of the $2,000 pension income tax credit, but you have to watch out for the effect of receiving this income as it may cause a claw-back on your OSA income. To split eligible pension income, both parties must file a joint election on their tax return (Form T1032). The transferor claims the deduction and the transferee includes the pension income received in that year.
I hope that some of this information will be useful in your own deliberations but I must recognize the contribution of my colleague, Ryan Dostie, CA, CFP, of the accounting firm of Welch LLP, who provided me with much of the data and other information used in this article. You are encouraged to seek further advice from myself or Mr. Dostie in order to implement your plans.
John Johnson is a partner with the law firm of Nelligan O’Brien Payne LLP (www.nelligan.ca), with offices in Ottawa, Kingston, Vankleek Hill and Alexandria.
[This article was originally published in the May 2009 issue of Fifty-Five Plus Magazine.]