Higher interest rates – like the strong options currently in market for GICs – can be attractive when building your hard-earned savings. They're even more attractive when you can tax-shelter your interest earnings.
In 2009, the Government of Canada introduced the Tax-Free Savings Account (TFSA) program, enabling eligible Canadians to grow funds tax-free within various types of financial products – including high-interest TFSA accounts, TFSA GICs, mutual funds, stocks and bonds.
And while TFSA products fall within the realm of personal banking, the TFSA program’s features can work strongly in an entrepreneur’s favour.
CWB Wealth’s Hilmar Lemke, AVP Distribution Services and Constance Cooper, AVP, Executive Financial Counselling & Education Services walk us through seven reasons why TFSAs make good sense for business owners.
1. Access funds for your business – with no tax penalty
If you need to use your savings, you can withdraw them with no tax penalty. Bonus: The following year you can put the same amount back into a TFSA with no impact to your contribution room for that year.
“Let’s say I have $100,000 saved in my TFSAs this year and want to withdraw $40,000 to put towards my business,” says Lemke. “In the following year and beyond, I can repay that $40,000 with no penalty. I can also still contribute up to my annual contribution limit.”
(Pro tip: There are two components to your TFSA contribution room – your individual unused contributions to date since 2009 and the federal government’s prescribed annual contribution limit.)
Cooper adds to always check your most recent Notice of Assessment to confirm your contribution room and then track your contributions throughout the year to avoid accidentally exceeding it.
“It’s best practice to get organized at the beginning of each tax year. Know your limit and keep a running record of every time you contribute. It can otherwise be easy to lose track of things, especially when you’re contributing to multiple through TFSA providers and products,” she says.
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2. Support your short- and medium-term business expenses
Whether you’re growing funds to offset higher loan payments and inflation costs, or creating a cushion for contingencies, Cooper says the flexibility of TFSAs can serve business owners well.
“While you need to be mindful of the liquidity of each TFSA product (for example a three-year locked in GIC term vs a high-interest TFSA account), there’s a huge benefit to being able to put money in and take money out as you need it – whether that money goes to support your personal needs or the needs of your business.”
3. Team up on your TFSA strategy with your business partner or spouse
Because the TFSA program is for eligible individuals, each person has their own contribution limit, there are opportunities to grow funds tax-free in TFSA products. The choice is also there to use TFSAs to help the business, explains Cooper. “It can become a team effort. A strategic and coordinated approach can work to the business’ advantage, including supporting your cash flow.”
She adds business couples can also think of TFSAs as a way to build a flexible “retirement plan,” noting that funds can really add up when both spouses are contributing towards this shared savings objective.
4. Tax-shelter your estate’s beneficiary payments
When it comes to paying beneficiaries, TFSAs have some estate planning features that business owners should consider exploring with their financial planner, suggests Lemke. “In contrast to RRSPs, which your beneficiary has to pay tax on when the RRSP is transferred to them, a TFSA can be transferred to your beneficiary with no tax penalty – and also with no impact on the beneficiary’s individual TFSA contribution room.”
He adds there can also be multiple TFSA beneficiaries, whereas RRSPs only allow for one. And so, for example, a business owner may choose to designate his TFSAs to his children and his RRSPs to his spouse.
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5. Grow your TFSAs now to optimize RRSP deductions later
It may or not may not be a deliberate part of your tax strategy, but if you’re in a lower personal income tax bracket, putting funds into a TFSA can be a better fit than contributing to an RRSP, says Lemke.
“RRSP tax deductions don’t benefit you as much when your taxes are already lower. The good news is that a TFSA is a great way to grow your money while allowing for flexibility if your situation changes. That’s because if you move into a higher tax bracket in the future, you can transfer funds from your TFSA into an RRSP and use that contribution to help offset the corresponding tax increase.”
6. Reduce tax hits and grow funds as a business owner in your senior years
When entrepreneurs reach the RRSP contribution cut-off age, they should be sure to incorporate TFSAs into their tax and savings strategies, say Cooper.
“At age 71, your RRSP must be converted to a RRIF or annuity, or paid out in a lump sum,” she explains. “But if you don’t need the money right away, one option is to move those funds into a TFSA. That way you’re investing the money back into something that allows it to grow tax-free until you’re ready to use it.”
7. Become a more attractive employer by including TFSAs in your company’s group savings program
Implementing an employer group savings program like CWB Wealth’s Wellness at Work can bolster your recruitment and retention efforts. Lemke says offering both RRSPs and TFSAs will make your program even more enticing to employees by appealing to a broader range of savings goals and scenarios.
“Some companies may have an older workforce with employees who are beyond the age where you can contribute to an RRSP. But they can still contribute to a TFSA, so it’s important to include that,” he says. “On the other hand, younger and middle-aged employees will need both long-term savings options and short- and medium-term ones. So offering both RRSPs and TFSAs supports their retirement goals while also getting them closer to that car, house, or vacation they’re saving up for.”