Share the wealth with a tax free savings account

The TaxLetter, MPL Communications Inc.
133 Richmond St.W., Toronto, ON, M5H 3M8. 1-800-804-8846

The government developed the attribution rules to prevent blatant income splitting.

Income splitting, of course, diverts income from a person in a high tax-bracket to a close relative earning little or no income.

Since the redirected earnings face little or no income taxes, the family achieves a substantial tax saving. Years ago, spouses with little or no earned income often reported large investment income.

To close such loopholes, the government introduced rules attributing the earnings back to the true income earner. As a result, it’s the income earner that has to pay income taxes on this investment income even it’s officially earned by a close relative.

Attribution rules do not apply to TFSAs

One recent exception to the attribution rules is for retired couples in some cases. And a new exception arises from Tax-Free Savings Accounts, or TFSAs. That is, the attribution rules that generally require families to jump through hoops to share income do not apply with the TFSAs.

Income-earning spouses may give the cash to lower-income or non-income-earning spouses to contribute to their TFSAs without triggering any tax consequences.

To anyone who has wrestled with the attribution rules, this is welcome relief.

Keep in mind that you can effectively income split with more than just your spouse. You can also give the cash to parents, in-laws and children over 18 with no tax consequences.

Since January 1, 2009, every Canadian resident 18 years or older has been able to deposit $5,000 a year into his or her TFSA. The total contribution room now stands at $25,500 (now indexed to the Consumer Price Index).

I believe that the TFSA will become increasingly important to future retirees. Particularly for younger Canadians who will now receive their Old Age Security payments at age 67, unless the government makes younger Canadians wait even longer before qualifying for OAS.

I also believe that Tax-Free Savings Accounts, or TFSAs, will become increasingly important to retirees-especially future retirees. That’s because TFSAs offer retirees some significant benefits.

One is that TFSA withdrawals will not be applied against any federal income-tested credits such as Old Age Security, the Guaranteed Income Supplement, or Goods and Services tax rebates.

Withdrawals from an RRSP (Registered Retirement Saving Plan) or a RRIF (Registered Retirement Income Fund), by contrast, count as income. This can reduce or eliminate any of these federal income-tested credits. A second benefit with TFSAs is that there are never withholding taxes on withdrawals – while you’re working or in retirement.

If you want, say, $10,000 you simply withdraw $10,000. Withdrawals from RRSPs or RRIFs, on the other hand, do face withholding taxes.

Generally speaking, for RRSPs 10 per cent is withheld on withdrawals of up to $5,000; 20 per cent on withdrawals from $5,001 to $15,000; and 30 per cent on withdrawals of over $15,000. Residents of Quebec face half of these rates but face provincial withholding taxes.

For RRIFs, there are no withholding taxes if you withdraw the required minimum. Beyond that, the same rates as for RRSPs apply.

This means that if you want $10,000, you’ll have to withdraw much more than that. This will raise your reported income and income taxes.

Then again, RRSP contributions generate income tax breaks while TFSA contributions do not – they’re made out of after-tax dollars.


The TaxLetter, MPL Communications Inc.
133 Richmond St.W., Toronto, ON, M5H 3M8. 1-800-804-8846

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