Life Care Insurance

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Contributor: Contributions can be made by/for those who have attained 18 years of age and are residents of Canada. There is no upper income limitation. Earned income limitation: There is no earned income limitation.

How Much: $5,000 for 2009 to 2012; $5,500 for 2013 and 2014; $10,000 for 2015; and $5,500 after 2015.

Tax Deduction: Contributions to the account are not deductible.

Penalty on excess contribution: These are subject to a 1% per month penalty until the amounts are removed.

Withdrawals (distributions) of both earnings and principal are tax exempt.

Effect of Withdrawals on TFSA room: Withdrawals (distributions) from the plan will create new TFSA contribution room. Take the money out – principal and earnings – for whatever purpose you wish. Then you can put it back to grow again – you don’t lose TFSA room once it is created.

Carry forward room: Unused contribution room can be carried forward on an indefinite basis.

Income testes benefits: Income-tested tax preferences like Child Tax Benefits, Employment Insurance Benefits or Old Age Security pension are not affected by earnings in the plan.

Attribution rules: There is no attribution rule attached to the TFSA, allowing parents and grandparents to transfer $5000 per year to each adult child in the family – for the rest of their lives. In addition, one spouse may transfer property into the TFSA of the other spouse without incurring attribution.

TFSA eligible investments: The same eligible investments as allowed within an RRSP will apply to the TFSA. A special rule will prohibit a TFSA from making an investment in any entity with which the account holder does not deal at arm’s length.

Interest deductibility: Interest paid on money borrowed to invest in the TFSA is not deductible.

Stop Loss Rules: A capital loss is denied when assets are disposed to a trust governed by an RRSP or RRIF. The same rule will be extended to investments disposed to a TFSA.

Use TFSA as security: A TFSA may be used as security for a loan or other indebtedness.

Departure tax: The TFSA is not caught by the departure tax rules. No TSFA contribution room is earned for those years where a person is non-resident and any withdrawals while non-resident cannot be replaced. The US does not recognize the TFSA, therefore any realized income should be non-taxable when removed after emigration. However, any capital appreciation will be taxable. Therefore it will make sense to remove capital properties from the TFSA on a tax-free basis immediately prior to emigrating to trigger the deemed disposition on a nominal gain on departure. Within a TSFA after the death of the taxpayer are taxable to the estate.

Marriage breakdown: Upon breakdown of a marriage or common-law partnership, the funds from one party’s TFSA may be transferred tax-free to the other party’s TFSA. This will have no effect on the contribution room of either of the parties.

Death of a TFSA holder: The funds within the account may be rolled over into their spouse’s TFSA or they may be withdrawn tax-free. Any amounts earned after the death of taxpayer within the TFSA is taxable to estate. Consider the potential of making contribution to TFSA for each adult in the family: • $5000 invested each year for a productive lifetime of 45 year (age 20 to 65) is $225,000. • Add a compounding rate of return of 5% to this invested inside a tax-sheltered plan and that TFSA investment will grow to $838,426 inside the plan. By comparison, if this deposit had been invested outside the TFSA the amount would be only $547,420. The tax-free savings therefore are just over $290,000 or over twice as much more! • At a 3% compounding interest rate, the accumulated capital would be $547,420 inside the TFSA, and only $376,253 outside of it, not as good, but still over $170,000 or 45% more in tax-free saving.