TFSA Strategies

[Gt-R R34]

Globe and Mail had a good article

TFSA strategies

So all of this leads to the question: How can TFSAs be used most effectively in your tax planning? Consider the following ideas:

1. Shelter taxable income. You'd do well to earn certain highly taxed income inside your TFSA where that income won't face tax. I'm thinking of interest income, certain options strategies or short-selling of securities (which can give rise to regular income), or foreign dividend income which is not eligible for the dividend tax credit. So, plan carefully which investments to hold in a TFSA.

2. Split income with your spouse. Simply giving money to your spouse to invest doesn't generally work to save tax because the attribution rules in our tax law will cause the income to be taxed in your hands instead. You can, however, give money to your spouse to contribute to a TFSA without concern that any taxable income will end up in your hands.

3. Trigger tax losses. If you're thinking of selling a security that has dropped in value in order to use the capital loss, but you like the future prospects of the investment, consider selling the security outside your TFSA, then contribute the cash to your TFSA and repurchase the investment inside the TFSA. The future growth of the investment will be tax sheltered.

4. Smooth fluctuating income. If your income fluctuates over time, consider contributing to your TFSA and make withdrawals from the TFSA to contribute to your RRSP in years when you might need an added deduction to reduce your taxable income, or withdraw funds from the TFSA in a lower income year to supplement your earnings.

5. Minimize clawbacks. By investing in your TFSA you can shelter future income on those assets so that it will not have to be reported on your personal tax return. This will reduce your taxable income and thereby reduce the impact of any potential clawback of Old Age Security or similar income-tested government benefits.

6. Help your children. If you're thinking of helping your kids with a major purchase, consider giving them money to contribute to their TFSA where it can compound tax free. You may also want to structure this as a loan, properly documented, to protect the assets from the potential breakdown of your child's marriage.

7. Draw from your TFSA first. When it comes time to make withdrawals in retirement, consider drawing down your TFSA assets first since those withdrawals are tax-free, and this can defer taxable withdrawals from your registered plans until you have to make those withdrawals under the minimum withdrawal rules or otherwise need the cash.

8. Create emergency savings. Set aside between three and six months of living expenses in a TFSA over time if you can.

[johny]

with interest at 4% when it started last year I figured I'd save about $50 in income tax for the year. now at 1% I'll save $12 for the year?. yah.

[misteranswer]

Thank you for telling us you only invest to get interest income. yah.

[Carl Johnson]

All of them are great advice but especially #4 on the combination of utilizing both the TFSA and RRSP.