TFSA Changes For 2023: What You Need To Know

The annual contribution limit for the tax-free savings account is set to rise to $6,500 for 2023. Greg Bonnell speaks with Nicole Ewing, Director, Tax and Estate Planning at TD Wealth, about what the changes may mean for investors.

Transcript

Greg Bonnell: We’re certainly living in inflationary times, and as a result, the contribution room for tax-free savings accounts has gone up as well. For 2023, it’s going to jump to from $6,000 to $6,500. So what does it all potentially mean for people who use TFSAs? Nicole Ewing, director of tax and estate planning at TD Wealth, joins us now with more. Nicole, great to see you again. Walk us through the significance of this and the timing of this.

Nicole Ewing: Well, so this is the first increase that we’ve seen since 2019, and the annual TFSA dollar limit is determined by the inflation. I mean, it’s indexed to inflation. And so CRA’s indexed inflation rate for next year for 2023 is 6.3% which is up from 2.4% for 2022, which we know is likely much higher than that. But that’s the rate that CRA sets on a going forward basis. So this is great news for folks who have an extra $500 to contribute.

Greg Bonnell: All right. So people who are already familiar with TFSAs might fully understand what the news means and what it could mean for their financial planning. What does it mean for an investor who perhaps is new to a TFSA?

Nicole Ewing: Well, this is great. So we may have people who are new to Canada who are for the first time having access to this account. And we might have folks who have been over the age of 18 and resident in Canada for some time but haven’t contributed to date. And what this means is that that contribution room, if you have been eligible since 2009 when TFSAs were introduced, you would now in 2023 have $88,000 of room. Now, if you haven’t contributed up until this point or if you’re saying, well, in 2023, I’m not going to have $6,500 to contribute, that’s OK. That amount rolls over into the future, and you will always have that $6,500 of available room in addition to any of your other room that has accrued over the years.

So $88,000, not an insignificant amount of money to be able to invest in and earn income tax sheltered. So there’s no taxation of the income while it is in the TFSA. And on withdrawal, it comes out tax free. So significant numbers that we’re talking about now.

Greg Bonnell: I’m going to get into some more complicated stuff in a second with you, but for people who are new to TFSAs, of course, it’s more than just a savings account. You can hold investments in that account.

Nicole Ewing: Exactly, Greg. Thank you for raising that. It’s important because the name is a bit of a misnomer, a tax-free savings account, and so some people incorrectly assume that it’s a savings account where you may get nominal interest. But you actually have the opportunity to invest in all sorts of investments, your ETFs, your regular stocks, and so earning that money in there as well. So there’s a great deal of flexibility with this account. It’s not just a short-term or long-term savings account. It can truly be an effective part of your portfolio for investing as well.

Greg Bonnell: All right, so that’s the TFSA 101, and it’s important for people new to it. But let’s get into something a little more complicated now. These changes, you say, could create an opportunity when it comes to income splitting. How does that work?

Nicole Ewing: So when we think about income splitting, and I’ll do a little 101 on that as well, what we’re trying to do is lower the family unit’s overall tax rate. And so if we think here where we have a spouse who’s in the top marginal rate and their spouse at a much lower rate, ultimately, what we’re trying to do is get income into the hands of that lower-income-earning spouse so that it can be taxed at their lower rate.

Now, as between spouses, usually, if I were to make a gift of funds to my spouse and they invest it in earned income, that income is actually attributed back to me. The CRA says no, no. You cannot simply gift funds between spouses and reduce the overall tax payable. It will be attributed back, any income, to the gifting spouse.

What’s unique about TFSAs is that those attribution rules won’t apply because we don’t actually have taxable income in the TFSA. And so we do have to be careful here. We cannot contribute to our spouse’s TFSA, but we can gift them money that they can then immediately put into their TFSA and have those funds growing tax-free as well.

Now, we want to be a little bit cautious because when we pull those funds out, the original amount is likely going to still be subject to attribution. So we may want to use those funds for personal needs, for a car, or other item that isn’t going to earn income on it. Or I may want to use the funds that my spouse has gifted to me for those personal uses and then invest my money in the TFSA, but a great opportunity to reduce the overall tax bill for the family. And apart from spouses, we can also gift these funds to our children over the age of 18 and have them invest in their own TFSA accounts. It’s a great opportunity for parents to, perhaps, educate their children on what a TFSA is, how it can be used, and be able to hopefully save for some of those later costs in a really tax effective way.

Greg Bonnell: All right, great points there all, Nicole. We’ve got about a minute left, but I did want to bring up the point that some people say, oh, this happens in 2023. Well, 2023 is just around the corner. What should we be thinking of as investors with these changes?

Nicole Ewing: Well, so first thing that comes to mind is if you are planning to withdraw from your TFSA in the new year, perhaps think about moving that date up to this year so that you — the contribution room resets in January. If you were to take those funds out in January, we’d need to wait an entire calendar year before we could recontribute. So something to think about there. Of course, we also want to think about rebalancing and your overall tax strategy.

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