Year-End Planning

Share Button

The Canadian government has recently announced that the contribution limits for this year’s TFSA (tax-free savings account) will remain unchanged at $5,500 dollars. The reason that this amount has not increased is that low inflationary rates during 2013 have not enabled the limit to exceed the $500 dollar mark that would have enabled it to increase to $6,000 dollars. As per the normal regulations, the stipulations for contributing to a tax-free savings account have remained unchanged. In simpler terms, those who are Canadian residents since 2009 and are over eighteen years of age have the ability to contribute up to $31,000 dollars in 2014.

Differences and Similarities Between RRSPs
Many of the features enjoyed with a TFSA are similar to the benefits offered by an RRSP (Registered Retirement Savings Plan). However, the main disparity between the two is that an RRSP will allow the individual to pay tax on income at a later date should the funds be withdrawn. Concerning a TFSA, tax is paid immediately with the deposit of all earnings. Still, the advantage with this option is that the entire sum can thereafter be withdrawn without being subject to any further taxes.

Which Option to Choose?
Ideally, many consumers would do well possessing both of these options. Still, those with a limited amount of available funds will most likely only choose one of the two. The primary determinant is most often the difference between today’s tax rate and the rate predicted when the funds will be withdrawn in the future. This is an important consideration for those who are currently employed (and thus paying a higher rate) and whose rates are expected to decline significantly upon retirement.

Still, a TFSA does come with an additional benefit that may prove to be of use with some taxpayers. The advantage is that if funds are withdrawn form this account, the very same amount of room for equal deposits will be reintroduced to the TFSA account during the next year. However, a word of caution should also be mentioned. It is essential for the account holder to wait until the next year, for funds that are reallocated into the account earlier may very well incur over-contribution penalties (exceeding the $31,000 dollar limit). This is a lesser-known fact that has recently garnered a fair amount of publicity.

Beating the Penalty
The best way to avoid paying such an over-contribution penalty is for one to remove the desired funds by the 31st of December. This will enable the account holder to avoid waiting more than a year to redeposit funds (note that the regulations are associated with calendar years as opposed to fiscal years).
These are some of the main features and benefits that can be enjoyed during the upcoming year. Of course, some of these guidelines may be a bit confusing and it is for this reason that a financial adviser is often times employed to help one understand the intricacies of the TFSA and the RRSP investment platforms.

Eric La CaraEric La CaraManaging Partner and Tax Practice manager for Capital Tax in Vancouver and Tokyo. Eric is a U.S. and Japan Personal & Corporate tax specialist with more than 15 years of experience in the area of cross-border structuring and taxation. Eric is charged with developing Capital Tax overall operations and strategic direction using the business and technical skills he has acquired during his professional career in Asia.