The Conservatives threw investors a bone in the 2008 budget — but it wasn’t the meaty one they promised: to make capital gains exempt from taxes if the proceeds of an asset sale were re-invested within six months. Instead, we got the “Tax-Free Savings Account.” Beginning in 2009, Canadian residents 18 and older can put up to $5,000 worth of stocks, mutual funds, bonds and other RRSP-eligible investments into a TFSA every year. The amount may seem like small potatoes, but the program’s features could get at least some investors salivating.
For starters, capital gains, interest and dividends that accumulate aren’t taxed and neither are withdrawals, which can be made at any time. Money taken out of a TFSA can be later returned, and unused contribution room can be carried forward indefinitely. To make the initiative palatable for seniors, it doesn’t affect a person’s eligibility to receive Old Age Security. The TFSA, however, does have a few unappetizing aspects: investments placed in a TFSA don’t decrease your taxable income as they do with RRSPs. “If you’re at the top marginal tax rate and believe you’ll be at a lower bracket when you retire, an RRSP would provide you with an advantage over a TFSA,” says Paul Hickey, a national tax partner with KPMG.
Losses incurred in a TFSA also won’t reduce taxable income in contrast to investments held outside an RRSP. Nevertheless, the program still has potential to help a lot of regular folks who take advantage of both RRSPs and TFSAs. The TFSA will help middle-class Canadians, who currently don’t have enough room in their RRSPs to adequately save for retirement, says Ian Russell, the president and CEO of the Investment Industry Association of Canada. He also says the initiative will come in handy long before a person’s golden years. “This is a very flexible instrument because you can use it to save for anything from a car to your kids’ education to funding for a business,” Russell says.
Aside from the TFSA, the budget offered some other programs for investors hungry for tax relief. For example, the time period for contributing to registered education savings plans has been increased by 10 years. Parents and other loved ones can now contribute to an RESP until the recipient is 31 years old. In the past they had to stop at age 21. The mineral exploration tax credit, which lets certain investors deduct taxes associated with a company’s Canadian exploration activities from their taxable income, has been extended to March 2009. And, donating unlisted securities — which can be exchanged for shares of a public company — to a registered charity will now exempt the donor from the capital gains on those assets.
The Tories also served up something in the budget for non-Canucks, a move that could help Canadian investors. Foreign VCs will no longer need to go through a time-consuming approval process or file loads of paperwork, when they sell an investment in a Canadian company. The change should help attract more foreign VC dollars, which should help more fledgling Canadian companies grow and eventually deliver better returns for their domestic investors.
All told, the Tories gave investors more than a few things to chew on. But these programs won’t totally remove the bad taste in people’s mouths from their broken promise on income trusts.