TFSA’s and Estates

Many Canadians have taken advantage of the Tax-Free Savings Accounts (TFSA) since their advent in 2009, but as a quick recap: they don’t reduce your taxable income when you invest in them; only the income earned on these investments is sheltered from tax. As a result, withdrawals from a TFSA are not taxable; they are not income.

When a person passes away their investments are all deemed to have been sold. In the case of a TFSA this does not result in any significant income tax, however that value may be included in the calculation of the Estate Administration Tax (historically and still commonly called Probate Fees) which is imposed by the Ontario government on the value of all the property that belonged to the deceased at the time of his or her death.

Having a will does not prevent Probate Fees being applied on TFSAs. In order to achieve that, you must name the beneficiary in the TFSA account itself.

There are two types of TFSA beneficiaries: Successor Holders, which are spouses or common-law partners, and Beneficiaries, which can be anyone. The Successor Holders are able to take over the ownership of the TFSA with no limits, no probate fees and no income tax. There are more restrictions on regular Beneficiaries, but at least probate fees won’t be payable. In the case of a non-spouse Beneficiary, any growth in the value of the TFSA after the date of death will be taxable to them and they will need room in their own TFSA to maintain the tax-free status of the funds.

Make sure you contact your financial institution or advisor to verify or change your TFSA designations.

Gwyneth James MBA CPA, CGA

NEW Address and NEW Name!

We are settling into our brand new office nicely and look forward to hosting you soon.

You will now find us at:

260 Milroy Dr, Unit #1
Peterborough, ON
K9H 7M9

Our telephone number and email addresses remain the same.

We have also made a small change to our name.

We are now:

Cody & James, Chartered Professional Accountants.

Wondering about this new designation and what it means?  Check out the CPA website for a short description:

CPA Canada

Save on Taxes with RRSPs and TFSAs

As most people know, the deadline to make an RRSP contribution that you can apply against your 2014 taxable income is March 1st, but you shouldn’t leave it until then to decide on this important savings strategy.

In fact, depending on your financial situation, an RRSP may not even be the best savings vehicle. Contributing to an RRSP reduces your taxable income, but when you withdraw that contribution it becomes taxable. The intention was to defer that withdrawal and associated tax until retirement when your income is expected to be lower. However, if, for example, you have a healthy pension plan your income in retirement will already be fairly high and the required withdrawals from your RRSP at that time will attract tax at a higher rate and possibly result in a clawback of your Old Age Security.

TFSA withdrawals are not considered income so they are not taxable, but they also don’t reduce your taxable income now when you invest in them; only the income earned on these investments is sheltered from tax. Amounts in TFSAs can be withdrawn at any time so they are better if you might have a short-term cash need.

There are two ways to use the money invested in your RRSP without actually withdrawing it: you can “borrow” from it to purchase your first home (Home Buyers Plan) or to attend a post-secondary institution (Lifelong Learning Plan). These two options add some flexibility to the RRSP route.

For most people RRSPs make the most sense. Take the tax refund you will likely receive and invest it in a TFSA for the most benefit. Neither investment vehicle is good for people who are short on self-discipline: if you withdraw from your RRSP you will be taxed on the amount; if you withdraw from your TFSA you may not be able to reinvest the amount until the next calendar year. Investing is for the long-term – leave it in there and let it grow!

Gwyneth James MBA CGA

It’s that time again….

Another year, another tax season. Many people engage a professional to prepare their tax return assuming that will ensure nothing is missed, but even the pros can only work with what information they are given and there is a limit to the number of questions they will ask. Here are some areas that frequently get missed:

  • Did you know that the phrase “Medical Expenses” includes such things as dental costs, hearing aid batteries, and travel health insurance?
  • Children’s Activity Credit does not only mean sports anymore. There’s another credit for things like music lessons and language courses. Keep your receipts.
  • Do you pay for a monthly bus pass? There’s a tax credit for that. It’s more common in larger centres so often gets overlooked here in Peterborough.
  • Did you move 40 km closer to your employer or to start a small business? That’s a deductible expense.
  • If you are receiving pension or RRIF income it can be split with your spouse and will often result in tax savings. You need to complete and sign a special election form.

If you are going to a tax preparer for the first time, remember to bring your Notice of Assessment from the prior year. This is the summary that the CRA (Canada Revenue Agency) sends you after you file your tax return and it contains all sorts of important information.

It is up to you to make sure you are taking advantage of everything that you are rightfully allowed to claim. CRA is not going to point out credits that you’ve missed.  Do your tax return early so you have time to do it right. Even if you owe, you can file early and post-date your payment to April 30.