Tax Free Savings Account
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| Categories: Accounting Topics Effective January 1, 2009
Tax-Free Money for What Matters to You
Canadians need to save for many different purposes over their lifetimes. Reducing taxes on savings can help.
That’s why the Government has introduced a new Tax-Free Savings Account (TFSA). It’s the single most important personal savings vehicle since the introduction of the Registered Retirement Savings Plan (RRSP).
The TFSA will allow Canadians to set money aside in eligible investment vehicles and watch those savings grow tax-free throughout their lifetimes. TFSA savings can be used to purchase a new car, renovate a house, start a small business or take a family vacation.
Canadians from all income levels and all walks of life can benefit.
How the TFSA Works:
- Starting in 2009, Canadians aged 18 and older can save up to $5,000 every year in a TFSA.
- Contributions to a TFSA will not be deductible for income tax purposes but investment income, including capital gains, earned in a TFSA will not be taxed, even when withdrawn.
- Unused TFSA contribution room can be carried forward to future years.
- You can withdraw funds from the TFSA at any time for any purpose.
- The amount withdrawn can be put back in the TFSA at a later date without reducing your contribution room.
- Neither income earned in a TFSA nor withdrawals will affect your eligibility for federal income-tested benefits and credits.
- Contributions to a spouse’s TFSA will be allowed and TFSA assets can be transferred to a spouse upon death.
Some people might wonder what the differences are between an RRSP and the new TFSA. An RRSP is primarily intended for retirement. The TFSA is like an RRSP for everything else in your life .
Both plans offer tax advantages, but they have key differences.
- Contributions to an RRSP are deductible and reduce your income for tax purposes. In contrast, your TFSA savings will not be deductible.
- Withdrawals from an RRSP are added to your income and taxed at current rates. Your TFSA withdrawals and growth within your account will not—they will be tax-free.
Not everyone is able to save each and every year.
Those who cannot contribute $5,000 in a given year will be able to carry forward their unused contribution room to future years.
In addition, Canadians may want to use their savings—to buy a new car or a cottage, or start a small business—and the full amount of withdrawals can be put back into the TFSA in the future.
Couples often save and plan together, so Canadians can contribute to their spouse’s or common-law partner’s TFSA, depending on the spouse’s or partner’s available room.
How to indirectly make your mortgage tax deductible
| Categories: Accounting Topics Unlike our US counterparts, as Canadians we have no way of claiming our mortgage interest as tax deductible, unless you have a rental investment property. Well there is another way many Canadians don’t know about. In short, it allows us a way of indirectly claiming our mortgage as a tax deduction. Its referred to as the Smith Manoeuvre.
The idea originated from Mr. Fraser Smith, who has also written a book on the subject. Essentially what this tool allows us to do is borrow against the equity in our home, invest it into income producing entities such as stocks which produce dividends and use the extra money received from your tax return to further pay down your mortgage.
In Canada, if you borrow money to invest in investment property or stocks which earn a dividend, you can deduct the interest paid to borrow this money on your tax return at the end of the year. Lets take a look at the steps in detail in order to use this tax legislation to indirectly make our mortgage tax deductible.
The first step is go and talk to your bank. You’ll most likely want to obtain a home equity line of credit. Its just a regular line of credit, but it is based on the equity portion of your home. As your mortgage gets paid down, the line of credit will increase. Use this line of credit to either purchase an investment property or stocks which produce income (such as dividends). Do not use this line of credit for RRSP’s, otherwise you will lose any tax deductible interest you may have! With every mortgage payment, your line of credit will increase and in turn you will invest the extra money back into these investments. At the end of the year, when you complete your tax return or you have the friendly folks at MGK Accounting Services prepare it, simply take the line of credit interest you paid throughout the year for your investments and deduct this amount. Take the refund money plus any dividends made throughout the year and apply both towards your mortgage to pay it down a bit more. Once this is done, your line of credit will increase again and you’ll take this money and reinvest once more. Follow the above steps until you are mortgage free!
If you follow the steps above, you’ll find that not only will you pay your mortgage down faster, but you will also have a large investment portfolio and you’ll be able to deduct the interest you would of otherwise paid out on your mortgage!
As with many things there are advantages and pitfalls of this type of leveraging, but for many this will provide many tax savings as well as a grand portfolio for retirement.
Next time, I’ll take a look at some of the things to consider when starting a business, as well as some of the pitfalls which I encountered when I started up a popular franchise a few years back.
MGK Accounting Services
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MGK Accounting Services goes blogging!
We at MGK Accounting Services have taken the leap to update the world of accounting with our new blog services. Link to our blog with your favorite news reader and stay on top of the accounting world!
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MGK Accounting Services blog is an informative way to stay on top of the personal tax world!
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- MGK Accounting Services
MGK Accounting Services goes blogging!
We at MGK Accounting Services have taken the leap to update the world of accounting with our new blog services. Link to our blog with your favorite news reader and stay on top of the accounting world!
Accounting Topics
- How to indirectly make your mortgage tax deductible
Unlike our US counterparts, as Canadians we have no way of claiming our mortgage interest as tax deductible, unless you have a rental investment property. Well there is another way many Canadians don’t know about. In short, it allows us a way of indirectly claiming our mortgage as a tax deduction. Its referred to as the Smith Manoeuvre.
The idea originated from Mr. Fraser Smith, who has also written a book on the subject. Essentially what this tool allows us to do is borrow against the equity in our home, invest it into income producing entities such as stocks which produce dividends and use the extra money received from your tax return to further pay down your mortgage.
In Canada, if you borrow money to invest in investment property or stocks which earn a dividend, you can deduct the interest paid to borrow this money on your tax return at the end of the year. Lets take a look at the steps in detail in order to use this tax legislation to indirectly make our mortgage tax deductible.
The first step is go and talk to your bank. You’ll most likely want to obtain a home equity line of credit. Its just a regular line of credit, but it is based on the equity portion of your home. As your mortgage gets paid down, the line of credit will increase. Use this line of credit to either purchase an investment property or stocks which produce income (such as dividends). Do not use this line of credit for RRSP’s, otherwise you will lose any tax deductible interest you may have! With every mortgage payment, your line of credit will increase and in turn you will invest the extra money back into these investments. At the end of the year, when you complete your tax return or you have the friendly folks at MGK Accounting Services prepare it, simply take the line of credit interest you paid throughout the year for your investments and deduct this amount. Take the refund money plus any dividends made throughout the year and apply both towards your mortgage to pay it down a bit more. Once this is done, your line of credit will increase again and you’ll take this money and reinvest once more. Follow the above steps until you are mortgage free!
If you follow the steps above, you’ll find that not only will you pay your mortgage down faster, but you will also have a large investment portfolio and you’ll be able to deduct the interest you would of otherwise paid out on your mortgage!
As with many things there are advantages and pitfalls of this type of leveraging, but for many this will provide many tax savings as well as a grand portfolio for retirement.
Next time, I’ll take a look at some of the things to consider when starting a business, as well as some of the pitfalls which I encountered when I started up a popular franchise a few years back.
- Tax Free Savings Account
Effective January 1, 2009
Tax-Free Money for What Matters to You
Canadians need to save for many different purposes over their lifetimes. Reducing taxes on savings can help.
That’s why the Government has introduced a new Tax-Free Savings Account (TFSA). It’s the single most important personal savings vehicle since the introduction of the Registered Retirement Savings Plan (RRSP).
The TFSA will allow Canadians to set money aside in eligible investment vehicles and watch those savings grow tax-free throughout their lifetimes. TFSA savings can be used to purchase a new car, renovate a house, start a small business or take a family vacation.
Canadians from all income levels and all walks of life can benefit.
How the TFSA Works:
- Starting in 2009, Canadians aged 18 and older can save up to $5,000 every year in a TFSA.
- Contributions to a TFSA will not be deductible for income tax purposes but investment income, including capital gains, earned in a TFSA will not be taxed, even when withdrawn.
- Unused TFSA contribution room can be carried forward to future years.
- You can withdraw funds from the TFSA at any time for any purpose.
- The amount withdrawn can be put back in the TFSA at a later date without reducing your contribution room.
- Neither income earned in a TFSA nor withdrawals will affect your eligibility for federal income-tested benefits and credits.
- Contributions to a spouse’s TFSA will be allowed and TFSA assets can be transferred to a spouse upon death.Some people might wonder what the differences are between an RRSP and the new TFSA. An RRSP is primarily intended for retirement. The TFSA is like an RRSP for everything else in your life .
Both plans offer tax advantages, but they have key differences.
- Contributions to an RRSP are deductible and reduce your income for tax purposes. In contrast, your TFSA savings will not be deductible.
- Withdrawals from an RRSP are added to your income and taxed at current rates. Your TFSA withdrawals and growth within your account will not—they will be tax-free.Not everyone is able to save each and every year.
Those who cannot contribute $5,000 in a given year will be able to carry forward their unused contribution room to future years.
In addition, Canadians may want to use their savings—to buy a new car or a cottage, or start a small business—and the full amount of withdrawals can be put back into the TFSA in the future.
Couples often save and plan together, so Canadians can contribute to their spouse’s or common-law partner’s TFSA, depending on the spouse’s or partner’s available room.
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