While many Canadians still seem enthusiastic about the benefits that a tax free savings account can provide, a number of polls suggest that the participation rate among eligible Canadians is stuck at around 25%. This presents many opportunities for advisors to discuss a TFSA with clients, said Wilmot George, director of tax and estate planning with Mackenzie Financial Corp., during a presentation at the 2010 Canadian Institute of Financial Planners in Niagara Falls, Ont. on Tuesday.

“Advisors should continue to get out there and continue to speak with their clients about the benefits of a TFSA,” he said. George noted that such discussions can also be an “asset gathering opportunity.” In addition, he added, opening a TFSA for clients can create greater financial security for them in the future.


According to a recent poll by Mackenzie Financial, Canadian investors’ familiarity with the TFSA, which has been available since 2009, is still not up to par: about 42% say that lack of knowledge is the reason they have not yet opened a TFSA.

In addition, 57% of respondents did not know that contributions grow tax free inside the TFSA; 64% were unaware that unused contribution room can be carried forward; and 78% were unaware that an individual can own multiple TFSA accounts, so long as the total contributed in one year does not exceed $5,000.

Of those who did contribute to a TFSA, 39% said the majority of their TFSA dollars are invested in short-term, low-risk, low-return investments.

“This should not come as a surprise to anyone, considering the recent economic situation,” said George. “But this provides a perfect opportunity for us to talk to our clients, and some of that money will be coming off the sidelines and the TFSA is a great place for [clients] to grow it tax free.”

George also pointed out that, while many investors are aware of the TFSA’s advantages — which include accumulation of tax-free income, the ability to re-contribute withdrawals and access to these funds without having an impact on federally sponsored benefits – there is a lack of information on the estate planning implications of a TFSA. This is key, since the majority of TFSA holders are over the age of 65: they need to be aware of what happens to a TFSA upon the death of the TFSA holder.

If a TFSA holder names a spouse or common-law partner as a successor to the account in the event of death, that person will acquire all the rights of the original TFSA holder on that person’s death. Successor holders do not require TFSA contribution room to receive this benefit. The naming of a successor holder ensures that income earned after the original holder’s death is not taxed. Without a named successor, income that has been earned inside the TFSA will be taxed after the holder dies.

If the holder of a TFSA designates a beneficiary who is not a spouse or common-law partner, tax free amounts that have accrued before death pass to the beneficiaries without tax. In that case, the accrued income in the TFSA is also passed to beneficiaries tax free. Income growth after death but before transfer to beneficiaries is taxable. Beneficiaries are required to have TFSA contribution room to shelter further growth from future tax. Only a spouse or common-law partner is entitled to an exempt contribution. In Quebec, TFSA transfers at death will pass through the deceased’s estate and will be governed by the will.


logo• Changes to CPP that could help clients
Wilmot George, director tax and estate planning at Mackenzie Financial, describes three changes to the Canada Pension Plan that the federal Department of Finance says will increase flexibility for Canadians to combine pension and work income. He spoke with Clare O’Hara of Investment Executive at the Canadian Financial Planners Conference in Niagara Falls. WATCH

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