Financial planning is a tricky business at the best of times – especially for longer-term goals like retirement and estate planning. But when the tax framework on which you’ve built your plan changes, that tricky business becomes that much harder.
If 2017 taught us anything, it’s that nothing lasts forever when it comes to financial planning for your future. For the hundreds of thousands of small businesses and professional corporations in Canada, the federal government’s new rules on income sprinkling and holding investment income in a corporation are creating both uncertainty and a need for many to go back to the drawing board and revise what they have in place. You can find a quick overview of the changes here.
While no one knows with certainty what future tax changes will be, we do know this: tax change itself is a certainty. The current tax framework in 2018 will not be the same in 2028. Governments will continue to tinker, creating new tax policies to address emerging needs and new tax policies to shutdown strategies that the government sees as “too tax effective” from a tax policy standpoint.
A recent article in the Globe and Mail highlighted a good example of what could change in the future – the TFSA. What began as a modest but very tax-effective savings vehicle is now almost 10 years old, with lifetime contribution limits approaching nearly $60,000 for those who were age 18 when TFSAs were introduced in 2009.
Is this one of the strategies that could be too effective to be sustainable long term? Time will tell. In the meantime, some suggestions for your financial planning:
- Diversify – avoid putting all your financial eggs in one strategy basket if possible, as your chosen basket may not look the same in 20 years;
- Monitor – make sure your financial planner or tax advisor has their ear to the ground in terms of proposed changes and possible impacts on you; and
- Be flexible – be prepared to change strategies, because future tax changes are a given and they could require you to change course.
Thank you for reading … Enjoy your day,
I recently came across an article titled TFSA Designations May Cause Estate Planning Problems written by Amin Mawani and published by Advisor.ca. The article highlights some important estate planning considerations for TFSA account holders.
In its April 2015 Budget, the Federal Government proposed raising the annual TFSA contribution limit from $5,500.00 to $10,000.00, and raising the cumulative TFSA contribution limit to $41,000.00. For many, these accounts have already become a substantial personal asset. This increased contribution room only increases the likelihood that these accounts will continue to grow into substantial estate assets for those who have and continue to contribute to them.
Without proper planning (i.e. without making the proper designations), one’s TFSA will revert to his or her estate on death, resulting in the unfortunate consequence of the account losing its tax-sheltered status, and rendering the funds subject to Ontario’s hefty probate fees.
Mawani’s article assists account holders by highlighting the various designation options available and by distinguishing between a designated successor-holder and a designated beneficiary. Mawani explains that an account holder may designate his or her spouse or common-law partner as a successor-holder and anyone else as a beneficiary. A successor-holder will trump a beneficiary if both are alive at the time of the original account holder’s death, and a beneficiary will trump the deceased’s estate if no successor-holder was nominated or if the successor-holder predeceases the account holder. If neither a successor-holder or a beneficiary are designated or alive at the account holder’s time of death, the account proceeds will then revert to the deceased’s estate.
Mawani goes on to explain the benefits of making such designations, including the fact that if such designations are made the account holder’s TFSA will not de-registered on death. The assets will remain continuously sheltered, and the successor-holder may make tax-free withdrawals after taking over ownership. In addition, he explains that the successor-holder can continue to have her or her own TFSA, with lifetime and annual contribution limits unaffected, or alternatively may choose to consolidate the deceased’s account into his or her own.
Finally, Mawani helpfully provides links to the designation forms for various Canadian institutions including BMO, Investors, RBC, Scotia and TD. The article is worth a read for anyone who currently contributing or planning to contribute to a TFSA.
Thank you for reading,
Starting last week, any resident of Canada over the age of 18 with a valid social insurance number can open up a tax-free savings account (TFSA) and make a contribution of up to $5,000 a year. Income earned inside a TFSA is not taxable and money can be withdrawn tax-free at any time. Click here to read a National Post article on TFSAs and what type of assets can be held within a TFSA.
When TFSAs were first introduced in the Federal Government’s 2008 budget, there were concerns with how TFSAs would be treated upon the death of the account holder. TFSAs allow account holders to name a spouse or a common law partner as a “successor account holder” to allow the successor account holder to maintain the TFSA of the deceased without a reduction in their own contributions. Upon death, the value of the TFSA is not included in income but any income that accrues after death is subject to tax.
However, the federal government likely lacks the jurisdiction to give effect to successor account holder designations without also be named in testamentary documents and requiring probate. Beneficiary designations to allow assets to pass outside of probate are within the domain of provincial jurisdiction and the provincial legislation needs to be amended to allow for TFSA designations similar to RRSP beneficiary designations.
Currently, many Ontario financial institutions are providing for both a beneficiary designation and successor account holder be named when a TFSA is opened. The big unanswered question is if probate will be required or if a TFSA is an asset that passes outside of the estate.
Once the issue of beneficiary designations is settled, TFSAs may become another estate planning tool.
Have a great day,