Now that the new federal Liberal government has reduced the annual contribution amount for tax-free savings accounts (TFSAs) to $5,500 a year from $10,000 effective 2016, your clients may be looking for advice on other ways to shelter their investment income from taxes.
“With the reduction to $5,500, taxpayers who have the wherewithal to put in the extra [$4,500] amount next year will now have to look for alternatives,” says Jamie Golombek, managing director of tax and estate planning, wealth advisory services, with Canadian Imperial Bank of Commerce in Toronto.
The TFSA announcement may be an opportunity for you to remind your clients of other tax savings options and strategies that they might consider, including maximizing their RRSPs, registered education savings plans (RESP) or registered disability savings plans (RDSP) contributions, if applicable. They could also look at tax-planning strategies involving insurance vehicles, Golombek says.
“Whether it’s a universal life or whole life policy, being able to put money into those policies still carries a significant tax advantage,” he says.
On Monday, the Liberals announced that they would be reducing the contribution amount for TFSAs and reintroducing indexing to inflation for the annual limit. However, they also said they would still allow Canadians to keep the full $10,000 of contribution room for 2015, whether they used it or not.
“What they’ve effectively done is codified the $10,000 TFSA limit for 2015,” Golombek says, “meaning that there’s really no urgency to rush out and get that $10,000 contributed for this year if you haven’t done so already. That contribution room will carry forward indefinitely.”
One of the most obvious alternatives for any extra cash originally meant for the TFSA, whose contribution limit was expanded to $10,000 this past spring, may be to direct the extra funds toward an RRSP, if there is RRSP contribution available. If your client doesn’t have any RRSP contribution room available, or if the individual is older than 71 and can no longer contribute to an RRSP, your client might consider contributing to an RESP, if there are young children in the family, including considering contributions above the minimum contribution amount needed to maximize the Canada Education Savings Grant (CESG).
“A contribution of $2,500 per year attracts a 20% CESG, but you can put in more than that,” Golombek says. “You only need $36,000 to top out on the $7,200 of maximum CESG, but you are allowed to put in $50,000 in total. You can put in more than the annual minimum amount, even though it won’t attract a grant, because you maxed out on grants. It’s still a way to get tax sheltering, in the RESP.”
Another option is the RDSP, which allows clients who have a family member who qualifies for the disability tax credit to shelter up to $200,000 on a tax-free basis, Golombek says.
Clients might also consider contributing to universal and whole life policies, particularly in the next calendar year. In 2017, rules governing the investment portion of these policies will reduce the tax advantages currently available.
“The rules are changing in 2017 as a result to the exempt test, but we still have a big opportunity to sock money away on a tax-deferred basis [until then],” Golombek says.
Clients should also consider their overall cash flow situation and make sure they’re applying solid financial planning fundamentals, Golombek says: “For people who maximized everything, you would look at paying down outstanding debt, especially if it’s high-interest debt.”
TFSA contribution amount by year
- 2009, $5,000
- 2010, $5,000
- 2011, $5,000
- 2012, $5,000
- 2013, $5,500
- 2014, $5,500
- 2015, $10,000
- 2016, $5,500
The total contribution amount on Jan. 1, 2016 for a Canadian who has never contributed to a TFSA will be $46,500, if the individual was 18 or older in 2009 and therefore had accumulated all the available contribution room since the TFSA was created.