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TFSA a gift to your estate

Posted on: February 7, 2018

Published on page 9 of the Feb 5-11, 2018 edition of the Saskatoon Express newspaper
By Derek Shevkenek
 
We began our family tour of the BHP Enchanted Forest Christmas light display, at the Saskatoon Forestry Farm. Suddenly, our 2 year-old loudly exclaimed in awe, “That’s SO BEAUDIBLE!!” Well, so are tax free savings accounts (TFSAs).
 
DEATH AND TAXES
 
According to Benjamin Franklin, the only two certainties in this world are “death and taxes.” However, when it comes to the time of death, TFSAs escape tax.
 
True, you had to use tax-paid dollars to contribute to your TFSAs in the first place. But after that, any investment gains and income are free from tax. How might you best take advantage of this?
 
First, it must be said that maximizing contributions to registered savings accounts like RRSPs (before TFSAs) in high income high tax years can make sense. The idea is when you eventually make withdrawals from RRSPs, you are taxed, but hopefully at a lower rate. Further, you’re able to invest money in RRSPs that would have been otherwise lost to the government as tax.
 
However, when you die, the full value of all your registered savings plans (RRSPs, RRIFs, LIRAs, etc.) are treated as regular income. For example, at death, say you have $250,000 of remaining registered savings. It’s taxable in the same manner as if you’d earned $250,000 of employment income in a single year. That’s a big tax bill. And your beneficiaries don’t receive proceeds from your registered accounts before tax. Tax must be paid first, and they’re left with the remainder.
 
CHEATING DEATH & MINIMIZING TAXES
 
As a result, if leaving more for loved ones upon your departure is a priority, in retirement it’s compelling to look at withdrawing from your TFSAs after registered savings are depleted. The idea is once you die you’ve minimized the balance of registered accounts and maximized the balance of TFSAs, since with TFSAs your beneficiaries receive the full balance. That also means attempting to maximize TFSA contributions well before retirement.
 
Can death be cheated? To some, that’s an interesting spiritual question to debate. But something not debatable is TFSAs can help minimize taxes at death when properly used. Remember, until that time, life and TFSAs are a “beaudible” gift.
 
 
Inquiry welcome at www.dereks.ca. Opinions are those of Derek Shevkenek and may not reflect those of BMO Nesbitt Burns Inc. The information and opinions contained herein have been compiled from sources believed reliable but no representation or warranty, express or implied, is made as to their accuracy or completeness. BMO Nesbitt Burns Inc. is a Member - Canadian Investor Protection Fund. Member of the Investment Industry Regulatory Organization of Canada. The comments included in this publication are not intended to be a definitive analysis of tax law. The comments contained herein are general in nature and professional advice regarding an individual's particular tax position should be obtained in respect of any person's specific circumstances.

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