Tax Tip[] Tax Credits

To TFSA or Not To TFSA: That Is The Question

“The rule of thumb is to invest in an RRSP and use the resultant tax savings to fund a TFSA contribution.”

In an ideal world, one would contribute to both a TFSA and an RRSP in the same year and benefit from both savings plans. Not everyone has this luxury, so the question often arises as to whether one should contribute to an RRSP or a TFSA. The answer is a resounding “It depends…”

A contribution to a RRSP is tax deductible, whereas a contribution to a TFSA is not. While both these savings plans offer compound tax-free growth, an RRSP contribution provides an immediate tax saving. Withdrawals from an RRSP are fully taxable, whereas withdrawals from a TFSA are not. If there is not enough free cash to fund both an RRSP and a TFSA, the rule of thumb is to invest in an RRSP and use the resultant tax savings to fund a TFSA contribution.

Where the marginal tax rate at the time of withdrawal from an RRSP is expected to be higher than the marginal tax rate at the time of the RRSP contribution, it may be better to make the maximum contribution to a TFSA first.

Other factors, such as the amount of time the funds will accumulate before they are withdrawn and the period during which the funds will be withdrawn, should also be considered.

The TFSA and RRSP rules are both singularly and collectively complex. A tax advisor should be consulted where both contributions cannot be funded in full, as the funding decision is fact dependent


TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.

The Tax-Free Savings Account

“The TFSA program offers taxpayers an opportunity to earn investment income tax-free.”

Starting in 2009, the TFSA program offers taxpayers an opportunity to earn a significant amount of investment income tax-free.

Unlike an RRSP, contributions to this new tax-assisted savings account are not tax-deductible; withdrawals of contributions and earnings are not taxable. TFSA contributions can only be made by an individual who is at least 18 years old. However, unlike an RRSP, there is neither an upper-age-limit nor any prerequisite for earned income.

Like an RRSP, investment income and capital gains earned on investments in the account are tax-free. Rules concerning permitted investments by an RRSP also apply to the TFSA.

A taxpayer can contribute up to $5,000 per year to a TFSA. An attractive feature of a TFSA is the lack of attribution of income for tax purposes.

Consequently, with careful planning, spouses should be able to avoid tax on the compound income they earn on total annual contributions of $10,000, from 2009. Parents can fund TFSA’s for children who are 18 or older.

The TFSA provides flexibility. Withdrawals from a TFSA are tax-free and can be made at any time. Amounts withdrawn from a TFSA (including accumulated income and gains) can be recontributed at any time. Any unused contribution room (like an RRSP) can be carried forward indefinitely.

The income earned in the TFSA, or amounts withdrawn from a TFSA, will not affect income, so they will not result in reductions to Old Age Security, Guaranteed Income Supplement, Employment Insurance, eligibility for the Canada Child Tax Benefit (CCTB), the Goods and Services Tax Credit (GSTC), the Working Income Tax Benefit (WITB), or the age credit.

The TFSA will provide an additional source of retirement income to all Canadians, particularly individuals over 18 with no earned income. However, the TFSA rules are deceptively complex and a tax advisor should be consulted before making any contributions, investments or withdrawals.


TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.

Transit Pass Credit & Fitness Tax Credit

“The transit pass credit is for 2006 and the fitness tax credit is for 2007.”

There seems to be some confusion about the years to which the fitness tax credit and transit pass credit apply. This Tax Tip is intended to clarify the situation. The fitness tax credit will apply for the 2007 taxation year. The transit pass credit willapply from the 2006 taxation year.

Transit Pass Credit

The transit pass credit applies in respect of “an eligible public transit pass” that allows the individual to use “public commuter transit services” provided by a qualified Canadian transit organization for an uninterrupted period of at least 28 days. There are many provisions that limit the ability to claim this credit. Taxpayers who purchase daily or weekly passes are not eligible for the transit pass credit, since the transit pass creditis meant to apply to transit passes that are for at least one month in duration.

Public commuter transit services are defined as services offered to the general public by means of bus, ferry, subway, train or tram. In situations where the transport only carries seven or eight passengers or where an automobile is used to commute,the cost will not qualify for the credit.

The transit pass credit will reduce taxes payable before claiming the tuition or education credits.In certain circumstances, the tuition and education credit can be carried forward to be used in a future year. On the other hand, the transit pass credit cannot be carried forward.

Children’s Fitness Tax Credit

Guidance is still being published by the CRA concerning which activities will qualify and the type of receipts required. In general, the fees must be paid for a child who is under 16 at any time in the year. The fees must relate to the cost of registration or membership in an eligible program or a physical fitness activity.

Registration and membership cost can include the cost of administration, instruction and the rental of facilities. However, eligible fees do not include accommodation, travel,food, or beverages. The ineligible amounts must be deducted from the total fees. Only thenet amount will qualify for the tax credit.


TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.