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Andy Wong
Monday, March 03, 2008
After the delivery of two aggressive, tax-busting federal budgets in 2007, draining the federal treasury in the process, last week's budget was predictably modest by way of tax initiatives.
Nonetheless, there are two notable items in the budget, one offering a clear win for Northerners.
Starting in 2008, the residency portion of our Northern residents deduction increases by 10 per cent, to $6,023 from $5,475. This translates into annual savings of about $170, $200 or $230, if your annual income is about $40,000, $80,000 or $130,000 respectively and you claim the full deduction. This isn't a huge gain but any tax savings is better than none. The Northern residents deduction was introduced in 1986 and this is the first time the $5,475 ceiling has been raised.
The second notable - undoubtedly the centerpiece of the budget - is the new Tax-Free Savings Account (TFSA), a tax-assisted, flexible and easy to understand program. This program will allow a new generation of savers to rack up investment gains without paying taxes. Investment income, i.e., capital gains, dividends or interest, in a TFSA will be totally tax-exempt.
Starting in 2009, residents in Canada age 18 or older can contribute $5,000 annually into a TFSA. The contributions are not tax deductible and the withdrawals are not taxable either. Saving for a big family vacation? You can plunk $5,000 into a TFSA invested in safe money-market investments, let it grow tax-free and withdraw it anytime with no tax consequences.
TFSAs can invest in the same investments as your registered retirement savings plan, i.e., stocks, bonds, mutual funds, GICs and term deposits, etc. It can be used as collateral for loans. The $5,000 annual contribution ceiling is indexed to inflation from 2010 on, in $500 increments, which is a nice touch.
Withdrawals from your TFSA are added to your following year's contribution room, allowing you to re-contribute funds previously withdrawn. If you under contribute in a year, the unused room is added to the next year limit. For example, if you contribute $2,000 in 2009, your limit for 2010 is $8,000 ($5,000+ $3,000).
Investment income earned in a TFSA after you die will be taxable; the income earned before death remains tax exempt. Your TFSA funds can be transferred into your surviving spouse's TFSA account. In the case of a separation or a divorce, funds from the TFSA can be transferred between the parties.
After you become a non-resident of Canada, your TFSA retains its tax-exempt status on investment income and withdrawals. However, as a non-resident, you cannot make new contributions and your TFSA does not build up unused contribution room during the years you remain a non-resident.
Interest on money borrowed to invest in a TFSA is not tax deductible, similar to the non-deductibility of interest on loans to buy RRSPs. Excess TFSA contributions are subject to a tax of one per cent per month, just like the one per cent per month penalty on excess RRSP contributions.
The Canada Revenue Agency will track your cumulative TFSA contribution room if you file your annual tax return.
Andy Wong is a tax consultant at MacKay LLP, Chartered Accountants in Yellowknife. He can be reached at andrew-wong@yel.mackayllp.ca.
