They say bad news travels fast, and this has undeniably been the case in the markets of late. I’ve been dismayed to see my equity-weighted RRSPs shrink in recent weeks, and it’s likely most of your clients have witnessed this happening to their accounts too.

While that might make your clients nervous, remember that what we’re looking at are paper losses. Since I don’t plan to retire for many years, I will continue to invest in equities to rebuild and grow my nest egg as well as continue to save for other objectives. So, it still makes sense to continue to build an RRSP and, as I’ve mentioned before, direct non-registered savings into a new tax-free savings account.

Not all investors are imbued with the wisdom of staying invested through the market’s dark passages, nor do they necessarily understand the full taxation implications of various accounts. This is where you can truly help your clients, first by calming their fears, then by re-emphasizing what will work for them in the long term.

With the example of TFSAs, you can show clients how such accounts can boost savings for retirement or other financial goals as well as provide tax efficiency and flexibility. The potential impact of TFSAs on your advisory business is considerable, despite the annual contribution room of only $5,000 per individual.

Consider the possibilities for a hypothetical family of five. Once the youngest child turns 18, you are looking at a cumulative annual contribution of $25,000; in a decade, the value of the family’s TFSAs could be $375,000. The math says that TFSAs provide an extraordinary opportunity to build generation-spanning relationships with clients.

To see how TFSAs can help, let’s look at some of the tax planning issues that apply to three stages in the investing life cycle of a typical family of five:

Accumulation phase

Picture a couple, 33 and 38, both working in middle income positions, one with a pension and no RRSP room, the other with only RRSP savings. They have three elementary school-aged children, and they’re in their prime spending years, with a mortgage, childcare expenses, RESP contributions, etc. This couple wants to save for retirement, but it’s a struggle.

The partner with a pension can use a TFSA —perhaps by making small, regular contributions —to supplement retirement savings. The partner dependent on an RRSP for retirement savings can choose between RRSP contributions or a TFSA. Given the couple’s financial situation, it is unlikely that this spouse will be able to make the maximum RRSP and TFSA contribution.

f The choice of using an RRSP or a TFSA for retirement savings depends on the person’s tax bracket at the time of contribution and at the time of withdrawal. If the marginal tax rate is higher at the time of contribution, an RRSP will be the better choice; if the reverse is true, a TFSA will be preferable. Remember, RRSP contributions are made with pre-tax dollars, and while they generate tax deductions, withdrawals will be taxed as ordinary income.

TFSA contributions, however, are made with after-tax dollars, and eventual withdrawals will be tax free. In this scenario, the advisor can help both partners arrive at the best savings combination, in part by projecting their incomes —and tax brackets —at retirement.

The beauty of the TFSA is that it allows for unexpected withdrawals, a reasonable possibility given the couple’s ages. Similarly, TFSAs can hold different investments in the same account, say a portion that might be earmarked for mid-term savings and another for long-term goals. Nor does it matter which spouse’s money is used to invest in a TFSA, because there is no attribution on earnings in this kind of account.

Over time, the financial advisor has an active role to play in helping the couple manage their contributions in order to gain long-term advantage.

To take one example, our couple might decide to cut back on RRSP or TFSA contributions in order to pay off their mortgage faster, on the assumption that mortgage rates could rise while investment returns diminish. An advisor can help them judge whether these assumptions are valid by evaluating expected rates of return on their investments as well as mortgage rate trends. In most cases, advisors would suggest that the couple continue RRSP and TFSA contributions while boosting mortgage payments, possibly by using their tax refunds from the RRSP deduction.

Transition phase

Now imagine a husband and wife, 57 and 62; one’s working in a high-income position, the other non-working. The couple have maximized their RRSP contributions, made RESP contributions to fund their children’s post-secondary costs and they also have non-registered investments. The couple have two children in university and a third still in high school, who eventually plans to continue on to post-secondary school. Their mortgage is paid off and they have relatively few large expenses. This family has been working with a plan, but will need adjustments as retirement approaches.

It’s paramount to take an active advisory role with this couple as they evaluate their lifestyle choices and aspirations in the decade or so leading up to retirement. You can work with them to fine tune their retirement income needs, evaluate their progress toward their goals and make any needed adjustments to their savings plan.

You can also help by pointing out the advantages of tax-efficient TFSAs. The most obvious move, assuming RRSPs have been maximized, is to transfer a portion of the non-registered savings into the new savings vehicle. Remember, there is no attribution on income earned in the spouse’s TFSA, because there is no tax on the account.

However, a transfer of non-registered holdings could trigger a capital gain on the disposition of the investments, and people should be aware that superficial loss rules could deny a capital loss incurred on an in-kind transfer from a non-registered account to a TFSA.

Therefore, earnings on $10,000 of the non-registered account can be tax free, regardless of who earned the money to buy the investments. An additional $10,000 can be saved next year and the year after —you can see how quickly this account could grow.

Longer term, the goal of a TFSA is to supplement retirement income and, by making the maximum annual contributions into retirement and beyond, individuals can reduce non-registered savings and thereby reduce taxes.

Over time, your advice on which investments to hold, and suggestions on rebalancing the family’s portfolio, will be valuable. You can also steer them toward holding tax-inefficient investments (for example, investments that generate interest or foreign dividends that will be taxed at ordinary rates) in their TFSAs.

There’s an additional advising opportunity by helping the couple’s children start to build savings. Assuming RESPs are fully funded, parents can set up TFSAs for their kids once they turn 18. Down the road, TFSA contributions made on the kids’ behalf can be used for down payments on homes or for some other purpose. Of course, parents will have to realize that once money is deposited in a child’s TFSA, it becomes the child’s money to withdraw and use as he or she pleases. Parents therefore have to balance the desire for tax savings against the loss of control.

Income phase

A couple, both over 65, retired debt free, and have three financially stable adult children. One of them has a company pension and some non-registered investments; the other, small RRSP savings that have yet to be converted to a RRIF or annuity. Both receive CPP and OAS. The task now is to manage assets to provide lifetime income while coping with unforeseen expenses (such as health care) and possibly leave a legacy for their heirs.

During this phase, the couple will need advice on asset mix to ensure their portfolio has the potential to outpace inflation and provide them with the necessary income. Equally, you can point out the continuing utility of a TFSA. This has a few aspects, starting with the desire of many pensioners to continue receiving OAS payments. OAS pensioners earning an annual net income of $64,718 or more begin to repay part of their pension benefits, and once net income reaches $104,903, OAS is eliminated. Any tax or financial planning strategy that enables pensioners to continue to receive OAS is paramount in this situation.

So how can you help them do this? First, the pension income can be split between the spouses. This will allow the couple to equalize income and potentially reduce their overall tax liability and OAS clawback. Also, they can transfer non-registered investments into a TFSA. Again, this will reduce taxes, with two caveats: as I mentioned earlier, the shift could trigger a capital gain on the disposition of the non-registered investments, and in the event of a loss on a transfer in kind from a non-registered account to a TFSA, superficial loss rules could deny the loss.

Overall, the tax strategy is to use the taxable account to supplement income (keeping an eye on realized capital gains that could reduce OAS) while maximum contributions are made to a TFSA in order to reduce taxes. You might well advise clients to put investments generating eligible dividends into their TFSAs. Although eligible dividends receive an overall favourable tax rate, the 45% grossed up factor can inflate net income when calculating the OAS clawback. As an advisor, you will have to judge each case on its merits to determine the right TFSA asset mix.

As for non-registered investments, it might make sense to place them in a tax-efficient withdrawal plan. Such products largely eliminate taxes, since return of capital from non-registered investments is not taxed, while withdrawals made when the original capital runs out will be taxed at the lower capital gain inclusion rate of 50%. Potentially, the cash flow from such a plan could be used to fund the TFSA.

Given increasing life expectancies, TFSAs will be useful financial supplements in boosting pension income and covering rising health costs. They will also have a positive impact on estate planning. Like RRSPs or RRIFs, they can be rolled over tax free to a surviving spouse without impacting that spouse’s TFSA room. On the survivor’s death, there will be no tax on the “disposition” of the TFSA, adding to the size of any inheritance.

Clearly, there are many aspects to the use of TFSAs at different stages of a family’s life. This creates benefits for investors, and just as well, opportunities for you to widen and deepen your client relationships.

Read Michele Munro’s previous columns on the TFSA.

How does the TFSA stack up to its U.S. and U.K. counterparts?

Advisors should embrace the TFSA

Michelle Munro is director, tax planning, for Fidelity Investments Canada. She can be reached at


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