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[H&R Block Insight - November 2008]
[Tax Free Savings Account - What Is It?]

Canadians have a reputation for being savers. But according to the Canada Tax Act, all investment income is considered taxable. This includes interest earned on savings in bank accounts or in savings bonds. So if you had any savings, you usually received a T5 slip around tax time and the income must be included on your tax return.

The last Federal Budget brought a little relief to the people with investment accounts. Starting in 2009, Canadians who are 18 years of age or older will be able to open a Tax-Free Savings Account (TFSA). Annual contributions are limited to $5,000 but the money earns interest or dividends tax free. You automatically get your $5,000 limit when you file your tax return.

The TFSA is different than a Registered Retirement Savings Plans (RRSPs). Any contributions to your RRSP are tax deductible. If you made a $5,000 RRSP contribution and your annual income is $40,000, you could expect a federal tax savings of $1,100. This is not the case for a TFSA.

Initially, the tax savings on a TFSA may not add up to huge amounts. For example, the current interest rate on savings accounts is about three percent. If you deposit $5,000 in the account on Jan 1, 2009, you will shelter about $150 of interest in the first year. Once you apply a standard tax rate, it will mean about $60 in tax savings.

Whether or not you would like to contribute to a TFSA depends on your situation. A TFSA provides more flexibility if you need to withdraw money. There is no penalty for withdrawing funds at any time and you still save up to $5,000 for the year. For example, if you had $5,000 in the account in January and then withdrew $2,000 in June, you could still re-deposit $2,000 by the end of the year with no penalty. A withdrawal from an RRSP has tax implications and usually takes longer to withdraw funds.

On the tax side, there are several things to consider. Are you expecting your income to increase or decrease in the next year? Are you going to be able to contribute the maximum amount to your RRSP? Are you planning to buy your first home and take advantage of the Home Buyers Plan? Do you need easy access to your money in case of emergencies? These are all questions to consider when deciding to open a TFSA.

Over the next couple of months, we will answer some of these questions so you can make an informed decision about opening a TFSA.

 

[Investing for Your Child's Future]

Recent economic news has been frightening and with so much turbulence, where do you invest your money? With so much uncertainty in the markets, Canada Savings Bonds (CSBs) could be an appealing investment product for a number of Canadians.

CSBs offer a safe investment and can be a means of transferring investment income to another family member such as a child or grandchild. Purchasing investments or transferring investments to a child is allowed but there are tax implications. Naming your child as the bondholder does not exempt you from paying tax on the earnings.

The Canada Revenue Agency (CRA) follows the attribution rules in the Tax Act whereby the earnings on investments will be attributed back to the purchaser rather than the owner. This will depend on the type of earning the investment provides - interest, dividends or capital gains.

In the case of investments, purchased 'in trust' for a minor child, any interest or dividends earned will be reported as income in the hands of the person that purchased the investment. So if you buy CSBs for a child, you must report the interest on your tax return and pay the income tax. However, this is only the case until the child reaches the age of majority.

Investments that provide capital gains are different. When stocks are purchased in child's name, the capital gain is reported by the person who owns the stock rather than the purchaser, even if it is a child. So if you purchase stock in ABC company 'in trust' for your child, they will need to report any capital gains incurred when the stock is sold.

If you are planning to purchase an investment for your child, it is always best to speak to a financial advisor before making the decision that is right for your situation. No matter what your decision, there will be tax implications.

 

[Reader Poll Results]

The recent October Reader Question asked: With the Federal Election looming, what kind of tax relief would you like to se the next government introduce?

  • 33% readers responded that tax rates should be reduced.
  • 11% readers responded that the amount of personal credits should be increased.
  • 45% readers responded that low income individuals (who earn less than $25,000) be tax exempt.

Readers shared a few of their own ideas on how the government could provide tax relief. One reader suggested that any further tax decreases may lead to a deficit so there shouldn't be any reductions. Another reader felt that the federal government should completely eliminate income tax since it was originally introduced to fund World War I and it is over. Another suggestion said that first time home buyers should get increased tax breaks since owning a home has become more expensive.

Thank you to everyone who responded to our poll.