Welcome to the March 2009 Legacy Capital Management newsletter.

March 09
LCM Newsletter

Continuing with our commitment to educate and empower the people we serve, we welcome you to the first issue in a series of financial related newsletters.  This environmentally friendly medium allows us a chance to reach out in a positive and informative way bringing solutions and strategies from the front lines of the financial services industry to your in-box.

This Month’s Feature: The Tax-Free Savings Account or ‘TFSA’

Introduced by the federal government in the 2008 budget, the TFSA is being heralded as the single most important savings vehicle since the 1957 launch of the Registered Retirement Savings Plan.  The financial media these days is earnestly looking for good news and this timely launch has so far been warmly received industry wide.  In a time of unprecedented instability and economic turmoil, this new program could give Canadians a much needed incentive during these tumultuous economic times to do what we know we should be doing, saving and investing.

The big question on most people’s minds is, "How does the account work and is it for me?"  Let’s look at some of the mechanics of the account.  If you are 18 years or older, and a Canadian resident, here are the facts:

  • Flexible investment options
        Mutual funds, stocks, bonds and GIC’s are all eligible. It’s NOT just a savings account

  • $5,000 limit in 2009
       The limit will increase each year indexed to inflation, rounded off to the nearest $500

  • Contributions are NOT tax-deductible
       Your TFSA is bought with after tax-dollars providing no tax relief at purchase time unlike your RRSP contribution

  • Tax-sheltered earnings
       Any interest, capital gains or dividend income you earn on your investments is not subject to tax as it grows

  • Unused room can be carried forward
       Unused contribution room can be carried forward indefinitely

  • Withdrawn amounts can be carried over
       If you accumulate $10,000 in your TFSA and withdraw $2,000, the following year you are eligible to contribute ($2,000 that you withdrew + $5,000 limit) $7,000 total.

  • Income from a TFSA has no impact on Government benefits
       Income tested benefits such as: GIS, OAS and Child Tax Benefit (to name a few) are not affected.

TFSA vs. RRSP

RRSPs are usually intended for retirement, but the TFSA can be used for a multitude of financial goals--including retirement.  We save money so that one day we can spend it.  The tax man treats the contribution, accumulation, and distribution phases differently for each type of account.   Let’s look at the differences in tax treatment of these accounts over the three different phases.

  1. Tax Deductibility on contributions
    RRSPs yield a tax break upfront, whereas the TFSA does not.

  2. Taxation on accumulation
    Both accounts are similar in that neither attracts tax on capital gains, dividends or interest income

  3. Taxation on withdrawals
    Withdrawals from the TFSA are completely tax free.  Withdrawals from the RRSP are added to whatever other income you may have and are also subject to withholding tax. Potentially a big tax hit

TFSA vs. Unregistered Savings

Comparing these two account types from a tax perspective on the basis of contribution, accumulation, and distribution yields some interesting points:

  1. Tax deductibility on contributions    
    Neither account yields any tax relief on the contribution.

  2. Taxation during accumulation    
    The TFSA offers tax sheltering of any type of capital gains, dividends, and interest income whereas the unregistered or open account does not.  Let’s look at the chart below to see what this means in actual dollars:
    Source - http://www.tfsa.gc.ca/

  3. Taxation at withdrawal    
    The TFSA withdrawals are completely tax free.  The unregistered savings are deemed to be sold and are taxable at this time.

Saving Tools Scenarios

With these basics in hand, let’s look at some scenarios of how people can use this exciting new savings tool.

  • Recently married twenty-something’s that after their pension adjustment have little RRSP room to save for a house using the Home Buyers Plan, could use the TFSA
  • People who have a higher risk tolerance can use the account to hold their more aggressive equity investments because they can liquidate their winners with no concern for the tax-man
  • Someone who needs to save for a particular item over a period of years who would like to have a combination of interest income and capital gains potentially added to their savings
  • People who are actively saving money that are mindful of the taxation of their retirement income during the spending phase of their assets can use the TFSA as a tax diversification tool
  • Retiree’s or near term retiree’s who have RRIF and or pension income that is more than they need, can use the TFSA to save and grow their excess cash flow
  • Anyone in a lower tax bracket may prefer to forgo the small tax relief of an RRSP in exchange for tax-free growth and withdrawals of the TFSA
  • Anyone who has accumulated enough cash value inside their whole life or universal life plan to keep the policy in force may wish to re-allocate some of those dollars to the TFSA giving them a cheaper, more flexible alternative that mirrors the same tax free growth and collateralized tax free income that properly funded permanent insurance products potentially provide.
  • Higher income individuals who have maxed out their RRSP contributions and are looking for other tax efficient places to save money

These are only a few of the available scenarios, but it should be clear that this account has a wide appeal and many useful applications.

In today’s hectic world let us go to work for you.  We know you have many choices of financial advisors and institutions in which to deal with.  Let us craft a holistic financial plan specifically tailored to your goals and financial means.  This will allow you to focus more on enjoying your life, instead of nervously checking your bank balance and worrying about financial markets.  Contact your Legacy Capital Management advisor today.

Legacy Capital Management and
Portfolio Strategies Corporation
#331, 3750 46th Ave SE
Calgary, Alberta
T2B 0L1
ph. 403.536.8833
fax 403.536.6464
info@lcmbrokerage.com
www.lcmbrokerage.com
www.portfoliostrategies.ca

"Mutual funds are offered through Portfolio Strategies Corporation. Other financial products are offered through Legacy Capital Management.  Please consult the prospectus or other offering document for details about investment products, including the features, fees, and risks associated with the products."

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