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The RESP almost-bonanza
The tax deduction that died
before it was born
A Liberal backbencher almost
made it really cheap for you to send your kids
or grandkids to university. But then politics
got in the way.
Liberal MP Dan McTeague's private
member's bill, slipped in under the Tories' radar
in early March, would have allowed you to contribute
up to $5,000 per year per child, all tax-deductible
(no deductions are currently available for RESPs).
That little gift could have saved you as much
as $2,000 a year in taxes.
But then federal finance minister
Jim Flaherty accused the Liberals of the worst
kind of duplicity, said the bill would cost the
treasury $900 million in lost tax revenues, and
told the nation it must choose between a tax break
or an election. Luckily for the treasury, the
beleaguered Grit leader Stéphane Dion was
nowhere near ready to go to the polls so his party
did not oppose the Tories' Ways and Means motion
that effectively kills Mr McTeague's bill.
Tell little Sally not to quit
that paper route just yet.
— M M Hannon
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Every doctor should have a stash
of cash — for a rainy day, for a downpayment, for
retirement. Well now, the government has a new way to
encourage you to do build one.
Last month, federal Finance Minister
Jim Flaherty — taking a break from sniping at Ontario
Premier Dalton McGuinty — unveiled in his latest
budget the new Tax-Free Savings Account (TFSA). The
general-purpose savings strategy will be available to
Canadians starting in 2009.
When the TFSA comes into effect,
you'll be able to contribute up to $5,000 a year. Those
funds and any subsequent investment gains are protected,
as the name implies, against tax. In the next 20 years,
the government hopes that nine out of 10 of us will
have a TFSA.
TFSA
vs RRSP
Think of it as an RRSP with one major distinction: you
aren't rewarded with a tax deduction when you put money
into the plan, but when you take your money out, unlike
an RRSP, you won't be taxed on it.
"When you crunch the numbers it's
just as good as an RRSP because you don't pay tax when
you take the money out," says Waterstreet Capital managing
director Tim Cestnick.
But in cases when you need your
money to stay put, the psychological barrier that an
RRSP provides can be a good thing. "With RRSPs, if you
take money out of the plan prematurely, you're going
to pay tax," Mr Cestnick says. "So that could actually
be a deterrent to people." That's especially true if
your goal is to save for your golden years.
"If what you're saving for is retirement,
an RRSP is the way to go," agrees Ernst & Young
chartered accountant Gena Katz.
LONGTERM
GAINS
Mr Cestnick still thinks the TFSA will be more useful
as a longterm savings vehicle. The true benefit is the
tax money that stays in your pocket and compounds over
time — but you have to let it sit. Let's say you
maximize your contributions for the first three years
and then take it all out. The difference between saving
what you did or investing the money outside a TFSA instead
is negligible, he says, because you didn't give the
money you sheltered from tax a chance to grow.
One benefit over the RRSP is that
when you're in retirement, a TFSA gives you the ability
to save beyond the age of 71 when you're forced to make
minimum withdrawals from your RRSP.
"This plan can certainly be used
to supplement retirement income," says Ms Katz.
A TFSA might be particularly useful
for higher-income earners, like doctors, who tend to
reach their maximum RRSP contribution limit and still
have money they'd like to save.
In some cases you need a place
to store funds to be used towards a major purchase.
Let's say you remove $16,000 five years from now to
put towards a car. If you decide to take some money
out, you don't have to justify how you'll use it. Not
only that, you get that contribution room back.
POTENTIAL
PITFALLS
If there's a drawback to the TFSA, it's the $5,000 tease.
As a professional with a higher disposable income, you
may not think the relatively low cap seems worth it.
Perhaps it isn't now but it's highly probable the government
will bump the cap incrementally over time.
Regardless of this limitation,
Mr Cestnick says it's a "no-brainer" to set aside money
for one of these new accounts. Even if you don't decide
to use a TFSA now, your contribution space carries forward.
The same investment vehicles available
to RRSPs can be used for TFSAs, anything from bonds
to mutual funds. If you're an avid investor, you may
want to give the TFSA a try.
"For an active trader turning over
a portfolio regularly and triggering gains, it's a good
idea," says Ms Katz. That's because you're inducing
a taxable situation. With a TFSA, those gains aren't
going anywhere.
If you're looking to borrow money
to invest, a TFSA isn't the way to go, Mr Cestnick says.
As an alternative strategy he suggests selling off an
existing investment and putting the cash into a TFSA.
Then you borrow money to replace investments you sold
off.
Let's say two years from now you
have $10,000 of unused contribution room. You also happen
to have another $10,000 in investments outside the plan.
You sell it off and put the proceeds into the TFSA.
Your next step is to borrow money to replace that investment.
You can now claim an interest deduction when you file
your tax return.
Mr Cestnick offers another opportunity
if you don't mind something a little riskier. When you've
built up the contribution capacity, investing in a private
company may be an option. The potential for large capital
gains is high, especially when the tax is taken out
of the equation.
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PHYSICIAN LIFE
