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| Investors and Retirees benefit from the Federal Budget
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COMMENTARY BY THE PATENAUDE SCHAFER GROUP
The biggest treat for investors in the recent Federal budget was the proposal for the Tax-Free Savings Account (TFSA), to start in 2009. This would allow Canadians to earn tax-free investment income while saving for any purpose, not just for retirement.The TFSA seems to be a way to partially address the 2006 pre-election promise to eliminate the capital gains when the proceeds of a disposition are re-invested.
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The contribution limit is $5,000 per year, increasing each year with the rate of inflation, in $500 increments. Contribution levels will be cumulative and carried forward, so investors will be able to catch up in the future ‘unused’ amounts from previous years. You will be able to invest in a full range of qualified investments such as stocks, bonds, mutual funds, GICs, etc.
Unlike the RRSP, the TFSA will not provide any tax deduction for deposits, but future withdrawals will be tax free. According to the government, the TFSA is a “flexible, registered general-purpose account that will allow Canadians to earn tax-free investment income.”
This is great news for Canadian investors! If a person contributes the maximum each year and reinvests the earnings, they could eventually be dealing with a significant amount of capital, which would be ‘non-taxable’ at withdrawal.
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The Tax Free Savings Account allows Canadians to earn Tax Free investment income
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Because the withdrawals and investment income will be exempt from taxation, investors will not be able to employ a leveraging strategy to deduct the interest income when borrowing to invest in the TFSA. However, unlike RRSPs, the TFSA should qualify as collateral which should help attain borrowing at more secure rates while not paying tax on the income from the collateral investment.
Other exciting budget news for retirees with LIFs (Life Income Funds) that have come from transfers out of federally-regulated pension plans are going to be more flexible. The budget proposes that people age 55 or older will be able to wind up an account smaller than $22,450, convert 50% of a larger account into a non-locked RRIF, or unlock up to $22,450 in the event of hardship. (Most provinces already have similar measures for transfers out of provincially-regulated pensions.)
If you have suffered from the maximum payment limits on a federally regulated LIF and want some income reprieve you are now in luck. I have personally sent letters to the Minister of Finance on behalf of clients wishing for some relaxation of withdrawal limits, and this achieves that.
Finally, registered education savings plans (RESPs) will now be allowed to remain open for longer terms and the restrictions around the educational assistance payments have also been softened.
If you are wondering how you may benefit from changes to this years Federal budget speak to a qualified financial advisor or you can call or email me with your questions at any time.
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