Taxes

A Reminder: The TFSA is a Valuable Tool for Every Stage of Life

Iwona Nicastri
CFP®, CLU
September 14, 2023

Taking a look at your recent CRA Notice of Assessment for your 2022 taxes, do you have available TFSA contribution room? Many of us are not fully maximizing tax-advantaged accounts — even the wealthiest Canadians are overlooking the opportunity. At last count, only 30 percent of taxpayers earning $250,000 or more had fully contributed.1 Beyond the significance of growing funds on a tax-free basis, here are some reminders of how the TFSA can be a valuable tool: 

Transferring Wealth While Alive — The TFSA may help to gradually transfer wealth to beneficiaries while you are alive. Gifted funds can be used by adult children to contribute to their own TFSA to grow over time, keeping in mind the loss of control of funds. This can also simplify an estate and potentially minimize taxes upon death.  

Approaching Retirement: RRSP/RRIF Meltdown Strategy — There may be benefit in gradually drawing down RRSP/RRIF funds as you approach retirement. One significant reason is if you are in a lower tax bracket than you will be in the future. A strategy may be to use RRSP/RRIF withdrawals to fund TFSA contributions. As the TFSA grows, this tax-free income can augment or replace RRIF withdrawals later. At death, these funds can pass entirely to heirs; residual RRSP/RRIF income could potentially be subject to the highest marginal tax rates.  

Funding Retirement — The TFSA can help optimize retirement income and cash-flow streams. TFSA withdrawals are not taxable and won’t affect income-tested benefits such as Old Age Security. A TFSA may also help with tax planning. For example, if generating RRIF income will put you in a higher marginal tax bracket, you may be able to minimize tax by withdrawing only the required RRIF amount and using TFSA withdrawals to supplement income. On the other hand, if your marginal tax rate is lower than you expect in the future or at death, funds in excess of the RRIF minimum requirement can be withdrawn and put into a TFSA where they can continue to grow. This can reduce an overall lifetime tax bill. The TFSA can also supplement cash flow if a retiree chooses to defer Canada Pension Plan benefits.  

Your Estate — The TFSA can be an excellent way to pass along assets on a tax-free basis. Consider the way you have designated beneficiaries: a named “beneficiary” will receive proceeds upon death tax free. However, if a spouse/partner is named as “successor holder,” they can continue operating the account “as is” going forward. Please contact the office if you require an update to beneficiary designations. 

The bottom line? Ensure you have fully contributed to your TFSA! 

1. https://www.canada.ca/content/dam/cra-arc/prog-policy/stats/tfsa-celi/2019/table1c-en.pdf 

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