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TFSA benefits for low income
March 19, 2017
11:01 pm
xup6.yc
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Just wondering if TFSA is still beneficial if i'm at the lowest possible tax bracket with pretty much no income annually.
From my understanding, my annual income is so low (>$5,000) that I don't need to pay any tax on it.
So would it still be recommended that I put money in TFSA? or can I just put them in a regular saving account? (since I wouldn't need to pay tax either way?)

I'm asking because I want to switch to EQ bank, but they only have regular saving accounts, so I was wonder how it'd affect me if I withdrew all my money from my TFSA into a reg saving account.

March 19, 2017
11:19 pm
Loonie
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No tax is no tax, whether it's from TFSA or from a regular bank account.

Reasons for choosing TFSA:

1. Upon your death, if you have a spouse and have designated that spouse as your beneficiary, he or she can acquire your TFSA tax-free and intact as a TFSA, thus increasing his or her TFSA.

2. Upon your death, if you do not have a spouse but have designated a beneficiary, that person can acquire the funds in your TFSA directly without probate unless the bank insists on the latter. I think but am not positive that there is no probate tax on this. If this applies to you, then check.

3. There is always the possibility that the government may end the TFSA programme, grandfathering in only those who have already contributed. This strikes me as unlikely, but who knows? It may prove wise to take advantage of any programme while you can.

Reasons for not choosing TFSA:

1. It's a bother. You have to fill out forms and you have to keep track of how much you contributed and when you contributed it and you must never lose that information.

2. If, at a later date, you wish to move the funds to another bank, you may have to pay a transfer fee, which will likely get larger as time passes.

3. If you ever choose to invest in stocks etc., you will have to make sure you don't fall under the government's notion of being a "trader".

4. If you anticipate making withdrawals from time to time, you will have to be very careful to observe the recontribution rules, namely that you must wait until the subsequent year to recontribute what you withdrew, assuming you had no other contribution room available. Again, you must keep meticulous records of what goes in and out of your TFSA, in perpetuity.

5. In general, if you don't really need to involve the government in your finances, why would you? At the moment at least, unlike RSPs, you can save all your contribution room until such time as you really need it to minimize or eliminate taxes.

6. Some financial institutions offer better rates for non-registered accounts. This may be a reason why EQ hasn't gotten into them yet.
That said, Peoples Trust offered 3% for several years in TFSA savings account. In that instance, the total return was probably better or at least as good as if you'd held it in a regular savings account, and even moreso for someone who was not paying any tax anyway. I'd take 3% any day over 2% if both were tax-free! That deal is gone, but there may be a similar one at some point somewhere, at which point you can reconsider your decision. Just keep an eye on after-tax comparisons, as you are doing.

Other members of the forum may have additional considerations to offer.
You need to decide which of these factors matter most in your situation.

March 20, 2017
4:28 am
2of3aintbad
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I think that you need a chequing account in order to open and fund an EQ account. Not everyone has one, so if you don't, you first should open one from an institution that supplies a few free cheques. Also EQ does not have a joint account option, which is important to some people. As pointed out, opening a TFSA involves some paperwork, so don't close your existing account until you need to, for example to avoid inactivity fees.

March 20, 2017
7:49 am
Norman1
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xup6.yc said

From my understanding, my annual income is so low (>$5,000) that I don't need to pay any tax on it.

So would it still be recommended that I put money in TFSA? or can I just put them in a regular saving account? (since I wouldn't need to pay tax either way?)

Depends on what the money is invested in.

It sounds like you don't really need TFSA for savings accounts and regular GIC's. The amount of interest paid each year, that is taxable each year, would be sheltered by the personal amounts each year.

TFSA may be needed for investments with more lumpy returns. For example, a portfolio of stocks that grows from $5,000 to $20,000 in twenty years. No tax on capital gains until actually realized in year #20. In that year, one sells and has $15,000 of capital gains to report.

March 20, 2017
12:30 pm
Doug
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The reason(s) Loonie cites as "cons" are hardly negatives, I'd argue. The documentation requirements are minimal, at best. And, funds that are transferred to a designated beneficiary are fully exempt from probate as they are not part of your Estate. Your bank may require a copy of the original will but that's about all they can do. It should be as simple with providing them a certified true copy of your death certificate by your Executor (make sure they ask the bank to photocopy it so you don't have to pay for additional copies from the provincial vital statistics agency!).

While it's true there might be higher rates in non-registered savings accounts, you're also taxable on these earnings. One needs to factor in the highest rate available in a TFSA account and compare that with the highest after tax rate in a non-registered account. Secondly, if you're only using it for basic savings, then I'd argue a TFSA is probably not for you unless you're young and expect to have a large balance by the time you retire and those earnings might impact the tax that you pay. (And if you're young and only investing in GICs, I'd encourage you to really take out some library books on risk/reward and 'coping strategies' to tolerate some degree of return if you hope to maintain your purchasing power, let alone generate any income/growth.) A TFSA truly is best used for investing in stocks and other fixed income securities, though my personal preference would be to use it like an RRSP, holding a diversified basket of geographically-diversified, low cost "passive" index-based ETFs or other funds especially if you're in the lowest tax bracket as you pay no tax on withdrawal. So for me, I'd probably hold stable, "large cap" REITs (or an equally-weighted, low cost REIT ETF in Canada) and equity ETFs in my TFSA and my Canadian dividend paying stocks (for portfolio "alpha") to take advantage of the federal dividend tax credit. For foreign securities, a TFSA is not recommended due to it not being classified as a long-term savings vehicle in the Canada/U.S. tax treaty so incurs withholding taxes on income from U.S. securities so that's where I'd probably utilize the RRSP - for all or part of the foreign component of your portfolio and, in there, I'd probably go with U.S.-listed ETFs to waive the withholding taxes unless you want some currency hedging component, in which case the TSX-listed ETFs make sense but you'd lose a bit to withholding taxes (probably only a few basis points added to the portfolio's MER) 🙂

Loonie's only other comment, really, other than an unsubstantiated one on "government surveillance" of your finances (which, I'd argue, they already do any way in their payment of government benefits, quarterly sales tax rebate payments, determination and coordination of applicable provincial Medical Services Plan Premium or Levy payments [if any] and in your statement of foreign holdings if you hold more than $100,000 in foreign assets [far too low in my opinion!]), was on the transfer fee, which is often reimbursable coded as a "transfer" (meaning it won't use your contribution room) by the "winning" FI if you bring over enough assets and/or lock it in to a GIC or put into their mutual funds or into a self-directed discount brokerage account anyway. They usually will offer it but sometimes you have to ask. (They'll likely ask you for "proof" of payment of the "transfer fee," so you can usually scan&email or fax a recent investment statement showing such.)sf-cool

#3 would only likely apply if you are making frequent, short-term "bets" (buying and selling a stock in the same month) and making a minimum of 1-2 trades (buy or sell) per day. There's not a lot of "case law" on this and, with the Liberals in power, it's not clear this is even a priority for the CRA anymore. But, if you're trading only 1-2 stocks per month and holding them for at least several months at a time, I'm reasonably confident the Tax Court of Canada will ultimately rule against the CRA on this, if any when cases make their way there. 🙂

#4 only applies if you're the sort of person who would make frequent withdrawals every year and have more than TFSA. And, it doesn't mean you have to keep "meticulous" records in perpetuity. Even when you retire and begin to "draw down" your TFSA, it's unlikely you'd be recontributing. Even if you did, all you'd need to do is check your "TFSA history" using CRA's My Account feature, go back to the last year in which you had neither a contribution nor a withdrawal and then factor in your contributions and withdrawals since then to determine what, if anything, you can contribute. sf-cool

Cheers,
Doug

March 20, 2017
3:10 pm
Loonie
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A competent executor will request sufficient valid copies of the death certificate at the time of death to deal with all the financial affairs of the estate. There have, however, been cases reported of financial institutions requiring evidence of probate granted before releasing TFSAs, not just the will and death cert. However, the same would be true of non-registered funds.

I made no reference at all to "government surveillance". My comment was with reference to the need to follow and always be aware of particular rules that apply to TFSAs, which can always change. This is not necessary outside of a TFSA. Rules regarding RSPs and RIFs have changed over time, and the ones regarding TFSAs will also do so in due course.

Doug's comment about short term buying and selling is correct. However, many people are inexperienced and naive on this question and will make and reverse a trade in short order. No telling what the courts will say, and who wants the hassle of going there? However, this is probably not a big issue for OP, who has stated intention to invest in savings account. Similarly, OP did not ask advice about what to invest in.

Transfer fees are not always reimbursed. They are never reimbursed by financial institutions that do not, themselves, charge them. This would include Hubert, Peoples, Oaken, for example.

My advice is generic as we don't know what "kind of person" OP is. We also can't speculate on what may be "unlikely" in this person's retirement years.

I think Doug has inadvertently made the case for keeping meticulous records. "All you have to do..." is a burden if you haven't kept the records. I would also keep all the TFSA bank statements, print copies. When the big hack of CRA comes, you'll be prepared. If you trust that CRA records will always be available and accurate, well, good luck to you. The government is still trying to figure out its staff paycheques after the installation of the new system which the previous government ordered, never mind anything else. Things can and do go wrong.

Doug makes a good point that unsheltered funds might, over time, becomes large enough, with profits, to create an excess income problem in old age, triggering other kinds of losses due to taxes and programme requirements. If this asset has been kept in TFSA all along, then it will not be an issue. This may be a good argument for putting the funds into a TFSA, even though I think it unlikely that it will be a significant problem for a very conservative investor with low income. It may depend on things like current age, future anticipated income, and other assets or expected inheritances.

It's true that EQ doesn't offer joint accounts, but this should not be an issue for someone who is contemplating a TFSA since they too don't allow joint accounts.

Again, each person must evaluate the pros and cons with reference to their particular situation.

March 20, 2017
5:57 pm
SavingIsGood
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Person asked: any benefit of having TFSA if income is so low?
Answer: NO benefit at all. Hunt for best interest of the day, keep moving your money and enjoy tax free interest.

March 20, 2017
8:10 pm
Bill
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Loonie, you say "At the moment at least, unlike RSPs, you can save all your contribution room until such time as you really need it to minimize or eliminate taxes." What do you mean by this? My understanding is that unused RSP contribution room does carryforward and accumulate, same as unused TFSA room.

March 21, 2017
1:52 am
Loonie
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I probably wasn't very clear, Bill.

What I meant was that with TFSAs you can save up the amount you are allowed to contribute and can contribute it at any time, even after age 70. If you withdraw any of it, you can recontribute it at any time after the year in which you withdrew it.

With RSPs, you can contribute in a given year, based on your income and any previous unused room, and can take the tax credit later as long as you have sufficient earned income to set it against. If you take it out, you can't recontribute it.

I find the latter significantly more restrictive.

March 21, 2017
1:58 am
2of3aintbad
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Bill said
Loonie, you say "At the moment at least, unlike RSPs, you can save all your contribution room until such time as you really need it to minimize or eliminate taxes." What do you mean by this? My understanding is that unused RSP contribution room does carryforward and accumulate, same as unused TFSA room.  

Your RSP contribution room can be carried forward but contributions cannot be made past the end of the year you turn 71. However, my understanding is that you can claim the deductions past that date, spread over several years.

March 21, 2017
4:26 am
Loonie
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I think I'm "losing it!sf-frown As I re-read this, I remember that what I was thinking about at the time was that at some later date you might need to contribute to the TFSA because you would otherwise be taxed on the income from the money and you would want to avoid that. RSP does not offer protection from taxation, only deferrals to an uncertain future rate with additional potential losses from age credit, OAS clawback, income-based programmes, etc.

I don't know if you can spread your RSP deductions past 71. Most people wouldn't want to, as they would want to put it against their highest earning years, which would likely be well before 71. In any event, unless this person soon brings in a lot more taxable income, this would not be an issue to consider.

Anyway, the RSP issue was probably largely a red herring in this situation. I'm sorry I seem to have gotten us off track.

March 21, 2017
5:11 am
Top It Up
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Loonie said
A competent executor will request sufficient valid copies of the death certificate at the time of death to deal with all the financial affairs of the estate. There have, however, been cases reported of financial institutions requiring evidence of probate granted before releasing TFSAs, not just the will and death cert. However, the same would be true of non-registered funds.
  

In the past 3 years I've been the executor for 2 estates dealing with a collective 5 financial institutions, both banks and CUs - they ALL required probate before any assigning or distribution could occur.

March 21, 2017
8:08 am
Norman1
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Loonie said
… I don't know if you can spread your RSP deductions past 71. Most people wouldn't want to, as they would want to put it against their highest earning years, which would likely be well before 71.…

RSP contributions can only be made before the end of the year one turns age 71, when the RSP's have to turned in RIF's, annuities, or collapsed. However, the resulting RSP deductions can be used anytime after that. I wrote about that earlier.

March 21, 2017
8:23 am
Norman1
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Top It Up said

In the past 3 years I've been the executor for 2 estates dealing with a collective 5 financial institutions, both banks and CUs - they ALL required probate before any assigning or distribution could occur.  

That is expected.

Financial institutions know what happens when they distribute before probate and probate later establishes that someone else is the rightful heir to the money. They are likely aware of cases like Monteiro v. Toronto Dominion Bank.

In that case, a TD Bank branch disbursed before estate dispute was legally settled and found itself owing the money, already disbursed to someone else, to the rightful beneficiary. Details in earlier post.

March 22, 2017
11:40 am
Doug
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I would think any court ruling that said probate was required to disburse assets with a "named beneficiary" in an RRSP, RRIF or TFSA will, ultimately, be overturned by higher courts. It's pretty "crystal clear" to me that these assets are specifically excluded from the deceased's Estate. That's certainly my understanding and the understanding of many minds sharper than my own. 🙂

Now, banks do have the option to disburse funds without a named beneficiary in accordance with the will but that's different and, yes, they are taking a degree of risk in doing so (without probate) and that typically required the "sign off" by certain levels of management (I know when I was with HSBC, the branch's Assistant Manager could sign off on amounts under $50,000, I believe, whereas Branch Manager approval was required for amounts over $50,000 and I think either District Vice President or even Executive Vice President approval would've been required for amounts over $100,000. In any event, I can't recall the bank ever approving disbursement without probate for amounts over $50,000 in the estates that I saw/worked with.). It's all about knowing the client, knowing the Executor, who would still bear some, if not most, of any liability for an improper disbursement without probate, would they not? There's a lot of liability to being an Executor people do not realize, especially income tax liability if the "tax man" doesn't get what "he" is owed. 😉

Cheers,
Doug

March 22, 2017
2:04 pm
Top It Up
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Doug said

There's a lot of liability to being an Executor people do not realize, especially income tax liability if the "tax man" doesn't get what "he" is owed.

You got that right ... final distribution should absolutely NOT occur, until the Executor gets that Clearance Certificate firmly in their hand.

March 22, 2017
3:36 pm
Doug
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Now...what I don't know is...if an Executor fails to get a Clearance Certificate, how far back can the CRA go to collect any potential taxes owed? Certainly, there must be some sort of "hard and fast" limit to that "reach," say the typical three years they're allowed to go back and do an audit or re-assessment or, worse case, 7 years. I can't imagine them having liability indefinitely. 🙁

Cheers,
Doug

March 22, 2017
4:16 pm
Rick
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I'd keep it in a TFSA and put any future contributions in EQ if you want to take advantage of the 2%. How big a deposit and difference in interest we talking about here. Have to be a big chunk of dough for me to bother with the hassles of moving it around for half a percent.

March 22, 2017
6:44 pm
Doug
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Rick said
I'd keep it in a TFSA and put any future contributions in EQ if you want to take advantage of the 2%. How big a deposit and difference in interest we talking about here. Have to be a big chunk of dough for me to bother with the hassles of moving it around for half a percent.  

Exactly, Rick. That's my thinking as well. If you feel you must use your TFSA for simple daily interest savings, look for the highest, regular posted rate available and go with that. In the example you cited, sure, you might be able to get 2.25-2.59% (perhaps higher) interest in a non-registered savings account so long as you shuffle money around quarterly and get those "net new money promo" offers each quarter but, even then, one needs to look at the fact that those "promo rates," which fluctuate each quarter and require juggling, are "before tax" rates. So, depending on your marginal tax rate (go with your highest one as that's how the income would be taxed above your pension, RRSP, RRIF and/or employment income), your effective "after tax" rate of interest won't be that much different than the tax-free 2% from EQ Bank. 🙂

In the event you want to move funds to another financial institution and the "receiving" institution won't reimburse your "transfer out" fee, as long as you don't maintain a bunch of TFSAs with every FI (I don't recommend that) as that would complicate your recordkeeping, you can easily withdraw those funds in early to mid December and then re-contribute those same funds, plus your new year's contribution room, as of January 1st in the new year. No fee charged. Ideally, I'd do the withdrawal December 1st so you don't earn any extra pennies of interest that "straggle over" into the new year. Keep the TFSA(s) (ideally one at a time, no more than two) to a minimum and that will result in minimal recordkeeping and strategically manage your withdrawals and re-contributions.

For me, I use non-registered savings accounts only because I don't utilize my TFSA for such low interest bearing deposits. I view the TFSA as more of a "super RRSP" and I really hope the government will consider renaming it as a Tax-Free Account (or "TFA"). 🙂

Cheers,
Doug

March 22, 2017
7:32 pm
Norman1
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Doug said
I would think any court ruling that said probate was required to disburse assets with a "named beneficiary" in an RRSP, RRIF or TFSA will, ultimately, be overturned by higher courts. It's pretty "crystal clear" to me that these assets are specifically excluded from the deceased's Estate. That's certainly my understanding and the understanding of many minds sharper than my own. 🙂

That's not quite correct.

Financial institution can disburse. But, doing so without direction from an executor appointed by a probated will does not legally satisfy what the financial institution owes the deceased account holder.

Beneficiary designations on RRSP, RRIF, TFSA, and life insurance can be revoked by a subsequent will. Earlier thread explored this in some detail. Real cases where account/life insurance with beneficiary designations were revoked by a subsequent will were Ashton Estate v South Muskoka Memorial Hospital Foundation in Ontario and Reimer (Dierk Estate) v. Smithgall & Kent in British Columbia.

…. It's all about knowing the client, knowing the Executor, who would still bear some, if not most, of any liability for an improper disbursement without probate, would they not? There's a lot of liability to being an Executor people do not realize, especially income tax liability if the "tax man" doesn't get what "he" is owed. 😉

Executor appointed by an unprobated will has no legal authority to bind the estate. Financial institution would be fully liable to the rightful heir or to creditors just as if it accepted direction from an unauthorized person.

The unprobated will may not be last will of the deceased.

There was a case in southwestern Ontario where the will was no longer valid. Unknown to the heirs, their father remarried a year before he died. sf-surprised The marriage revoked the will executed years before.

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