Financial Planning, Investment Counselling, Tax and Accounting

Contents

Tax-free Savings Account
Joint ownership
Providing increased flexibility for locked-in pensions
Wait list insurance - Is it worth the money?

Tax-free Savings Account (TFSA)

In the 2008 Budget, Finance Minister Jim Flaherty announced the creation of a new savings vehicle, the Tax-Free Savings Account (TFSA). While the TFSA is similar to an RRSP, there are some notable differences. As with an RRSP, the account is intended to help Canadians save money and plan for future expenses. However the contributions you make to the TFSA are made with after-tax dollars but withdrawals are tax-free.

Available to Canadians 18 and older, the TFSA will allow you to invest up to $5,000 annually, and carry forward any unused contribution room from year to year. There will be no lifetime contribution limit.

However the most notable advantage of TFSA is that there is no tax on investment income, including capital gains.  For savvy investors who realize significant investment gains in these accounts, this will represent significant tax savings over time.

Some of the details from the Conservative Budget:

• Starting in 2009, Canadian residents age 18 or older will be eligible to contribute up to $5,000 annually to a TFSA, with unused room being carried forward.
• Contributions will not be deductible.
• Capital gains and other investment income earned in a TFSA will not be taxed.
• Withdrawals will be tax-free.
• Neither income earned within a TFSA nor withdrawals from it will affect eligibility for federal income-tested benefits and credits.
• Withdrawals will create contribution room for future savings.
• Contributions to a spouse’s or common-law partner’s TFSA will be allowed, and TFSA assets will be transferable to the TFSA of a spouse or common-law partner upon death.
• Qualified investments include all arm’s-length Registered Retirement Savings Plan (RRSP) qualified investments.
• The $5,000 annual contribution limit will be indexed to inflation in $500 increments.

According to the Budget release, "in recognition of the fact that couples often make their savings decisions and plan for their financial security on a joint basis, individuals may contribute to the TFSA of their spouse or common-law partner, subject to the spouse or partner’s available contribution room."

Joint ownership — Understand the rules of joint accounts

Joint ownership is one of the most common estate planning strategies used by Canadians. The advantage is that on the death of one of the owners, the asset passes directly to the other owner(s), bypassing the cost of probate. As one ages, widowed parents often seek to simplify their estate administration by making their non-registered accounts joint with right of survivor with a child or children. Up to this point the strategy has worked well enough, except there are now two new legal cases (Madsen Estate v. Taylor, 2006 & Pecore v. Pecore, 2007) that can put these arrangements into question.

Making an account joint with an adult child is, in effect, a gift to that child. So, in theory, there is a disposition for tax purposes and, from the moment of gifting on, the child should report their share of the investment income on their tax return.

In most cases there is no reporting of the disposition as it is still considered the parent’s money. This has the potential for becoming very problematic as the siblings may have very different interpretation of the parent’s intentions.

Here is an example of a potential problem.  A widowed mother plans to leave her estate to her four adult children, but her youngest daughter has been especially helpful during her mother’s period of ill-health.  So, the mother decides to make her non-registered investment account joint with her youngest daughter as a reward after her death. The daughter did not declare any of the investment income nor withdraw any of the funds while the mother was alive. So was this a strategy designed to avoid probate or an inheritance to just one child? As there is no proof of intent, the current default court decision would most likely be that the funds were held in trust for the estate and are to be distributed among the four beneficiaries.

So could this potential litigious situation been avoided? Yes, the mother could have consulted with her lawyer to determine the best way to transfer this asset. The other method would be to document the intent. This is done by a “Declaration of Intent”, a simple letter that describes the intent of a change or a transaction and is then signed, dated, and witnessed. No one can then second-guess mom’s or dad’s intent after their death, thereby reducing the chances of a messy dispute with your siblings in a time of grief.

Providing increased flexibility for locked-in pensions

Many seniors and other Canadians want increased flexibility to use their retirement savings when and how they want to, as part of the wide range of employment and leisure choices available to them. Increased flexibility can also be important when financial circumstances change, and an individual requires access to his or her retirement savings to help meet current financial needs. In response, Budget 2008 proposes to increase the choices available to holders of Life Income Funds (LIFs).

LIF accounts are very similar to RRSP accounts.  The distinction is that the funds in the LIF originated from a federally-regulated registered pension plan.  For this reason, LIF plan are somewhat more tightly regulated than RRSP accounts.  In particular, there are restrictions on when funds can be withdrawn from the account.  Withdrawals are also currently subject to strict annual withdrawal limits.

Budget 2008 proposes to significantly expand the flexibility to withdraw funds from LIFs through three provisions:

1. Individuals 55 or older with small holdings of up to $22,450 will be able to wind up their accounts with the option to convert to a tax-deferred savings vehicle. The threshold for small holdings will increase with the average industrial wage.
2. Individuals 55 or older will be entitled to a one-time conversion of up to 50 per cent of LIF holdings into a tax-deferred savings vehicle with no maximum withdrawal limits.
3. All individuals facing financial hardship (e.g. low income, high disability or medical-related costs) will be entitled to unlock up to $22,450. This maximum will also increase with the average industrial wage.

These provisions will ensure that LIF holders will have the flexibility they need to manage their retirement savings based on the wide range of choices available today.

Wait list insurance – Is it worth the money?

Medical Access Insurance Plus+ is a new type of insurance policy underwritten by Industrial Alliance that is essentially medical wait list insurance. If you get put on a waiting list for a prescribed test or treatment, and the estimated waiting time is longer than 45 days, the policy kicks in and pays for the medical procedure privately (most likely in the U.S.) right away plus any approved travel cost.

The policy also has some other rather unique features.  There is no medical questionnaire to be completed as part of the application; the list of covered test and medical conditions is extensive; and there is no deductible when you file a claim.However, is it worth the $131 a month premium (based on a 45 year-old) it is going to cost to cover you and your family?

There is much to love about the Canadian universal health care system, but you have to ask yourself, “Are things getting better or worse?” In 2007, the median wait between the time a patient was referred by a GP to the onset of treatment was more than 18 weeks according to the Fraser Institute, a conservative think tank that has consistently lobbied for increased privatization of health care. This is double the time it was a decade ago and demographic trends suggest it will only get worse.

Jim Irwin, VP Business Development with Acure Health Corp., is in charge of marketing this policy and suggests that the faster you can get a diagnosis, the faster you can get treatment, especially when it comes to seeing a specialist. “Doctors will tell you the earlier you can diagnosis things like cancer, the better chance you have for survival”. There is also the stress factor to consider over a long wait for a test.

This type of insurance is new to Canada but has been around for 20 years in the UK and also is quite popular in Australia. It comes with a concierge service akin to second opinion insurance; they will review your medical records and tell you whether they concur with your doctor’s prescribed treatment.

This product is clearly designed for the more affluent client who has significant financial resources. You can almost think of it as wealth insurance — maybe I could afford $100,000 for a heart bypass in the U.S., but I would rather not have to make that choice. From a financial perspective, you should only consider this policy after plans are in place to achieve all of your other financial goals.