A Savings Plan for All Canadians for Their Future
The Government proposes to reduce the taxation of savings through the introduction of a Tax-Free Savings Account (TFSA)
How the Tax-Free Savings Account Will Work

• Starting in 2009, Canadian residents age 18 or older will be eligible to contribute up to $5,000 annually to a TFSA, with unused room being carried forward.
• Contributions will not be deductible.
• Capital gains and other investment income earned in a TFSA will not be taxed.
• Withdrawals will be tax-free.
• Neither income earned within a TFSA nor withdrawals from it will affect eligibility for federal income-tested benefits and credits.
• Withdrawals will create contribution room for future savings.
• Contributions to a spouse’s or common-law partner’s TFSA will be allowed, and TFSA assets will be transferable to the TFSA of a spouse or common-law partner upon death.
• Qualified investments include all arm’s-length Registered Retirement Savings Plan (RRSP) qualified investments.
• The $5,000 annual contribution limit will be indexed to inflation in $500 increments.

Why should you open a TFSA?

• The TFSA will provide a flexible savings vehicle for Canadians.
• Since not everyone is able to save each year, individuals who are unable to contribute $5,000 in a year will be able to carry forward unused contribution room to future years.
• The TFSA complements existing savings plans such as registered pension plans, RRSPs, Registered Education Savings Plans (RESPs) and Registered Disability Savings Plan.

Full Flexibility to Withdraw and Re-Contribute

• In addition, in recognition of the fact that most people are likely to have multiple savings objectives at the various stages of their lives—e.g. to purchase a car, home or cottage—the full amount of withdrawals may be re-contributed to a TFSA in the future, to ensure that there is no loss in a person’s total savings room.
• In recognition of the fact that couples often make their savings decisions and plan for their financial security on a joint basis, individuals may contribute to the TFSA of their spouse or common-law partner, subject to the spouse or partner’s available contribution room.

Saving in a TFSA to Meet Unforeseen Needs

• Canadians will also benefit by being able to use the TFSA to start saving early for a range of needs they may have in the future.
• Many Canadians may prefer to use a TFSA to save for pre-retirement needs given the absence of tax consequences on withdrawals and the ability to avoid the use of RRSP room for non-retirement savings needs.

A Savings Account for Post-Retirement Needs

• The TFSA will also provide seniors with a savings vehicle to meet any ongoing savings needs, something to which they have only limited access once they are over the age of 71 and are required to begin drawing down their retirement savings. Based on current savings patterns, seniors are expected to receive one-half of the total benefits provided by the TFSA.

No Impact on Income-Tested Benefits

• Tax Free Savings Accounts will not affect your eligibility for federal income-tested benefits, such as the Canada Child Tax Benefit and the Guaranteed Income Supplement.
• Money you take out of your Tax-Free Savings Account will not affect federal income-tested benefits and credits, so you’re not penalized for saving.

The Tax Relief Provided by a TFSA Will Grow in the Future

• This amount will increase in the future to take inflation into account.

More details on the TFSA and its design features are provided in the link below:http://www.cra-arc.gc.ca/gncy/bdgt/2008/txfr-eng.html

Here are links to the Canada Old Age Security OAS program and the Canada Pension Plan CPP:

OAS (you can print the 10 page application from here)
CPP

If you start your pension at 60, your monthly payment is 30 percent lower than if you wait until you’re 65. However, by starting it sooner, you will likely receive it for a longer time. If you start your pension at 70, your monthly payment is 30 percent higher than if you had taken it at 65. There is no financial benefit in delaying your pension beyond age 70.

In last week’s column, I discussed an advantage of annuity income in reducing one’s taxable income and helping to prevent the clawback of the Old Age Security (OAS) payment. It raised a number of questions about the OAS program. What is it? Who’s eligible? What is the benefit amount and what is the OAS clawback?

What is it?
OAS is a federal government program that provides a basic amount of retirement income to eligible individuals. The OAS payment is taxable at both the federal and provincial levels. The amount of the payment is not dependent on past employment or salary.

Who is eligible?
To be eligible to receive the OAS benefit, an individual must be a Canadian citizen or legal resident, at least 65 years old and a resident of Canada for a minimum of 10 years after reaching the age of 18 years.

To qualify for the maximum OAS pension, you must have lived in Canada (after reaching the age of 18) for at least 40 years. If you have lived in Canada for more than 10 years but less than 40 years, your OAS payment will be prorated. For example, if you have lived here for 30 years, you are eligible for 30/40 or 75 per cent of the maximum OAS pension. Currently, the maximum OAS pension is $487.54 per month.

What is the clawback?
The OAS clawback means that high-income earners are required to repay some or the entire OAS pension. If your net annual income, including the OAS benefit, exceeds the threshold amount, then a portion is required to be repaid. For 2006, the annual income threshold is $62,144. You will not receive OAS payments if your net annual income exceeds $101,031. Last week, in discussing insured annuities, I noted that much of the annuity income is a return of principal and therefore does not add to one’s taxable income. This helps keep high income below the OAS clawback threshold. Astute investors seek these types of opportunities and work with their advisors to maximize returns while reducing taxable income.

Bev Moir is a Senior Investment Executive and financial planner with The Moir Team at ScotiaMcLeod, Toronto. ScotiaMcLeod is a division of Scotia Capital Inc., a member of the Scotiabank Group. Member Canadian Investor Protection Fund (CIPF).

This article is for information purposes only. It is recommended that individuals consult with a financial or tax advisor before acting on any information contained in this article. When discussing Life Insurance Products, ScotiaMcLeod Investment Executives are acting as Life Underwriters representing ScotiaMcLeod Financial Services (Ontario) Inc. The opinions stated are not necessarily those of Scotia Capital or The Bank of Nova Scotia.

Q. The 2006 federal budget contained a number of proposed changes to personal income tax. What are they? – Terry S.

A. Many changes affecting your taxes were proposed in last Tuesday’s Federal budget. Two specific changes to note are the proposed cuts to the GST and personal income tax. These will impact your personal finances the most. Provided the budget is approved, effective July 1, 2006, the GST rate will be reduced from 7% to 6% and the change in the lowest personal income tax rate for taxable incomes moves from 15% in 2005, to 15.25% in 2006 and 15.5% in 2007. The15.25% rate for 2006 applies to taxable incomes below $36,378.

There are also a number of proposed changes to the basic personal amount, credits and other deductions. Some highlights include: an increase in the basic personal amount to $9,039 for the first half of 2006 and then, on July 1, 2006 when the GST is reduced by 1%, the basic personal amount will be reduced by $400 to $8,639. Effective July 1, 2006, a new Canada Employment Credit will be introduced that will give a tax break to Canadian employees, recognizing expenses for such things as home computers, uniforms and supplies. As well, there is a new Universal Child Care Benefit, and non-refundable tax credit for the cost of monthly public transit passes. Under the current tax system, individuals age 65 and over are entitled to claim a $1,000 pension income credit for eligible pension income. The budget proposes to double the Pension Income Credit to $2,000.

Proposed for 2007 are a Child Fitness Credit and new student initiatives, new deductions for employed trades people, a new lifetime capital gains exemptions, and changes to donations of securities. To encourage the donation of publicly traded securities to charitable organizations, the budget proposes to completely eliminate any capital gains payable on the donation of these securities to charities by reducing the capital gains inclusion rate for such donations to zero.

Stay tuned to see if the proposed changes come to fruition…

Bev Moir is a financial planner with The Moir Team at ScotiaMcLeod in Toronto. ScotiaMcLeod is a division of Scotia Capital Inc., a member of the Scotiabank Group. Member CIPF.

This article is for information purposes only. It is recommended that individuals consult with a financial or tax advisor before acting on any information contained in this article. The opinions stated are not necessarily those of Scotia Capital or The Bank of Nova Scotia.

Q: Are there any changes I should be making to my investment portfolio in light of the recently passed Bill 43 and 2005 Federal Budget. What impact will this have on my portfolio? Are there any changes I need to make? – Maria L.

A: Last week, the 2005 Federal Budget received Royal Assent making it law. This legislation contained a number of announcements related to personal income tax that may affect your finances. The budget specifically addressed registered retirement savings plans (RRSPs), but there are four main points of note:

The annual contribution limit (currently $16,500 for 2005) is scheduled to increase as follows:
2006-$18,000
2007-$19,000
2008-$20,000
2009-$21,000
2010-$22,000
2011-Indexed to average wage growth

The RRSP Foreign Property Rule that currently limits the amount of foreign property to 30% of the account will be eliminated retroactive to January 1, 2005.

Qualified RRSP investments will now include investment grade bullion coins, bars and certificates.

Federally regulated Life Income Funds (LIFs) will no longer be required to be converted to an annuity by age 80.

Something to consider when reviewing your portfolio:
The Canadian stock market, as represented by the TSX/S&P 60 index, accounts for less than 3% of world capital assets. The federal government’s move in removing the foreign content limit gives us unfettered access to global markets and allows us to enhance the diversification of our retirement savings. This is important because it offers us the opportunity to increase potential returns over time and to reduce the effects of market volatility in our portfolios.

There are a number of ways to access foreign investments. A popular choice is to buy mutual funds or other pooled investments that invest directly in securities listed on any of the global stock markets. Alternatively, investors can buy listed securities on one of the foreign exchanges – such as the S&P500; American Depository Receipts (ADR’s) – which are U.S. dollar-denominated shares of international securities; or index, or exchange traded funds (ETFs) as they are known on many foreign exchanges. Today, almost 100% of the world’s equity is located outside of Canada. Re-balancing your portfolio to take advantage of new rules to invest in foreign markets may be prudent.

Bev is a Financial Planner with The Moir Team at ScotiaMcLeod in Toronto.

This article is for information purposes only. All performance data represents past performance and is not indicative of future performance. The opinions stated are not necessarily those of Scotia Capital or The Bank of Nova Scotia. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.