Taxation of Investment Income Tax Free Savings Account

1. Taxation of Investment Income Tax Free Savings Account 4th Tax Planning for the Wealthy Family Course – Feb. 26, 2009 Presented by: Mimi C. Tang, CFP, CLU CHFC, Investment Advisor Mimi Tang Wealth Mgmt. & Consulting Ltd. www.mimitang.ca

2. Mimi Tang Wealth Mgmt. & Consulting Ltd. Mimi C. Tang, CFP CLU CHFC President Mimi Tang offers financial planning and insurance services as an independent Representative, under Mimi Tang Wealth Mgmt. and Consulting Ltd. and these Services are offered independently of Peak Securities. Mimi Tang is an Investment Advisor for Peak Securities Inc. Peak Securities Inc., An IIROC (formerly known as IDA) registered, full service investment broker, limits its responsibilities to Investment products such as stocks, bonds, and mutual funds. Peak Securities Inc. is a member of the Canadian Investor Protection Fund. www.mimitang.ca Mimi Tang Wealth Mgmt. & Consulting Ltd.

3. WELCOME • Why are you here today? • How did you accumulate your wealth? www.mimitang.ca Mimi Tang Wealth Mgmt. & Consulting Ltd.

4. Agenda • Planning • Types of Investments • Factors that Influence those Investments • Tax Free Savings Account (TFSA)

5. $5,000 Ferrari Loan Source: www.carforums.net/.../pictures/Ferrari10.jpg

6. WEALTH is a Result of Planning Self-discipline Hard Work Perseverance www.mimitang.ca Mimi Tang Wealth Mgmt. & Consulting Ltd.

7. Think & Grow Rich “ Anybody can wish for riches, and most people do, but only a few know that a definite plan, plus a burning desire for wealth, are the only dependable means of accumulating wealth.” Napoleon Hill Mimi Tang Wealth Mgmt. & Consulting Ltd. www.mimitang.ca

8. Questions to consider? • How do we plan ? • What are various types of investment income? • What are the tax treatments? www.mimitang.ca Mimi Tang Wealth Mgmt. & Consulting Ltd.

9. Source of Income • Interest – GIC, Term Deposits, Canada Savings Bond • Dividends – received from Canadian corporations • Capital Gains – gain on any stock, real estate, etc. www.mimitang.ca Mimi Tang Wealth Mgmt. & Consulting Ltd.

10. After-Tax Income on $10,000 Source of Income Inclusion Income Reported Tax After Tax Income Rate on Tax Return Payable(MTR40%) ---------------------------------------------------------------------------------------------------------------------- Eligible Cdn 145% $14,500 $2,500 $7,500 Dividend Income Interest 100% 10,000 4,000 6,000 Capital Gain 50% 5,000 2,000 8,000 www.mimitang.ca Mimi Tang Wealth Mgmt. & Consulting Ltd.

11. Top Dividend Payers in the TSX as of January 23, 2009 www.mimitang.ca Mimi Tang Wealth Mgmt. & Consulting Ltd.

12. Trivia? • In BC, how much can someone earn in 2008 of eligible dividend and not have to pay income tax if there is no other source of income? Mimi Tang Wealth Mgmt. & Consulting Ltd. www.mimitang.ca

13. $70,000 www.mimitang.ca Mimi Tang Wealth Mgmt. & Consulting Ltd.

14. Ex: 2008 Eligible Dividends received $48,276 • Taxable Div. (48,276x145%) $70,000 • Federal Tax (37,885x15%) 5,683 over (32,115x22%) 7,065 • Total Federal Tax $12,748 • Less: Non-refundable tax credit: • Basic Personal Amt.* $1,440 • Federal Dividend Tax CR** 13,276 -$14,716 Total Tax Payable 0 * ($9,600x15%) ** (70,000x18.9655%) www.mimitang.ca 13 Mimi Tang Wealth Mgmt. & Consulting Ltd.

15. BC Personal Tax Rate TableFed. & Prov. Marginal Tax Rates 2009 $38,833 to over Taxable Income 71,433 126,265 Salary 29.7% 43% Interest 29.7% 43% Eligible Dividends 0% 19.9% Capital Gains 14.9% 21.9% www.mimitang.ca Mimi Tang Wealth Mgmt. & Consulting Ltd.

16. Foreign Income • Interest or dividend income from another country, is reported as income in CDN $ • If foreign taxes are paid on interest or dividend income, foreign tax credit maybe claimed • Foreign income is treated like interest income – 100% taxable Mimi Tang Wealth Mgmt. & Consulting Ltd. www.mimitang.ca 15

17. Capital Gains • Calculate capital gain or loss: Proceeds of disposition minus: Adjusted Cost Base (ACB) minus: outlays & expenses incurred to sell your property. __________________________________________________________________________ Capital Gain or Loss Mimi Tang Wealth Mgmt. & Consulting Ltd. www.mimitang.ca

18. Market Crises • Current economic crisis • US sub-prime • 1987 Market Crash • Asian Financial Crisis • 911 Terrorist Attack More crisis to come … Markets will continue to return to their true Value over time. www.mimitang.ca Mimi Tang Wealth Mgmt. & Consulting Ltd.

19. Black Monday, October 19, 1987 • DJIA tumbled 508 points or 22.6% • One trillion of US stock market value was wiped out • In less than two years, stocks returned to their pre-crash summer 1987 highs www.mimitang.ca Mimi Tang Wealth Mgmt. & Consulting Ltd.

20. Asian Financial Crisis, October 27, 1997 • DJIA plunged 554 points or 7.2% • Less than 127 days (March, 1997) • Markets recovered www.mimitang.ca Mimi Tang Wealth Mgmt. & Consulting Ltd.

21. September 11, 2001 Black Tuesday • DJIA suspended trading for four days • Resumed trading Sept.17, 2001 • Dropped 684.81points, closed 8920.7 • November 2001 – less than 50 days, markets recovered www.mimitang.ca Mimi Tang Wealth Mgmt. & Consulting Ltd.

22. Warren Buffet “ Be fearful when others are greedy and be greedy when others are fearful.” www.mimitang.ca Mimi Tang Wealth Mgmt. & Consulting Ltd.

23. Tax-Free Savings Account Effective: January 1, 2009 Mimi Tang Wealth Mgmt. & Consulting Ltd. www.mimitang.ca

24. TAX-FREE SAVINGS ACCOUNT (TFSA) • Available to Canadian residents, 18 years or older (with no upper limit) • Annual contribution limit of $5,000 • Contributions not tax-deductible • Excess contributions subject to tax 1% per month • Unused contribution room can be carried forward indefinitely www.mimitang.ca Mimi Tang Wealth Mgmt. & Consulting Ltd.

25. TFSA Contribution Limit after 2009 • After 2009, the annual TFSA dollar limit will be indexed to the inflation rate. www.mimitang.ca Mimi Tang Wealth Mgmt. & Consulting Ltd.

26. Contribution to a TFSA, 18 year old • You cannot contribute to a TFSA until 18. However, when at 18, you will be able to contribute up to $5,000 because this amount will not be prorated. 18th Mimi Tang Wealth Mgmt. & Consulting Ltd. www.mimitang.ca

27. TFSA Withdrawals • No tax on withdrawals • Withdrawals made from a TFSA in the year will be added back to the TFSA contribution room at the beginning of the following year • You cannot contribute more than your TFSA contribution room in a given year, even if withdrawals are made from the account during the year. • you will be subject to a tax of 1% of the highest amount in the month, for each month you are in an over contribution position. www.mimitang.ca Mimi Tang Wealth Mgmt. & Consulting Ltd.

28. TFSA Contribution Room • Canada Revenue Agency (CRA) will determine the TFSA Contribution Room for each eligible individual. Your Annual Contribution Room will be indicated on your Notice of Assessment. CRA Notice of Assessment www.mimitang.ca Mimi Tang Wealth Mgmt. & Consulting Ltd.

29. Non-Residents of Canada • Allowed to keep TFSA and not be taxed on any earnings in the account or on withdrawals. • No TFSA contribution room will accrue for any year as a non-resident. • Any withdrawals made during the period as a non-resident will be added back to the unused TFSA contribution room in the following year. However, it will only be available if you resume your Canadian residency status. www.mimitang.ca Mimi Tang Wealth Mgmt. & Consulting Ltd.

30. Death of a TFSA Holder • The holder is considered to have received, immediately before death, an amount equal to the Fair Market Value (FMV) of all the property held in the TFSA at the time of death. • All earnings that accrue after the holder's death will be taxable to their beneficiaries. • A beneficiary will not have to pay tax on any payments made out of the TFSA that do not exceed the FMV of all the property held in the TFSA at the time of death. www.mimitang.ca Mimi Tang Wealth Mgmt. & Consulting Ltd.

31. Allowable TFSA Transfers • Marriage or common-law breakdown • Transfer upon death of a TFSA holder: • If the deceased holder named their spouse or common law as the SOLE beneficiary of the TFSA • As a result, the spouse or common law becomes the successor holder under the plan www.mimitang.ca Mimi Tang Wealth Mgmt. & Consulting Ltd.

32. TFSA Income and Growth is not taxable! www.mimitang.ca Mimi Tang Wealth Mgmt. & Consulting Ltd.

33. TFSA • Withdrawals • Not taxable • Withdrawals can be added to the contributor’s TFSA contribution room for the following year • Not affect eligibility for federal income-tested benefits or tax credits like OAS claw back (above $64,718) www.mimitang.ca Mimi Tang Wealth Mgmt. & Consulting Ltd.

34. TFSA • Income earned or withdrawn from a TFSA will not affect eligibility for federal income-tested benefits and credits: • Old Age Security benefits (OAS) • Guaranteed Income Supplement (GIS) • Employment Insurance (EI) benefits • Working Income Tax Benefit (WITB) • Goods and Services Tax Credit (GSTC) • Canada Child Tax Benefit (CCTB). Mimi Tang Wealth Mgmt. & Consulting Ltd. www.mimitang.ca

35. TFSA • Who should contribute to a TFSA? • Holders of Non-Registered Investment Accounts • Have maximized their RRSP contributions • Seniors over 71 • Wish to preserve income-tested benefits • Family member who would like to give without being subject to income attribution rules Mimi Tang Wealth Mgmt. & Consulting Ltd. www.mimitang.ca

36. No Attribution Rule • You can give your spouse or common-law partner money to contribute to a TFSA without that money being attributed back to you. However, all contributions they make to their TFSA must not exceed their TFSA contribution room. www.mimitang.ca Mimi Tang Wealth Mgmt. & Consulting Ltd.

37. Allowable Investments • Generally, same as those permitted in a Registered Retirement Savings Plan(RRSP) • Mutual Funds • Securities listed on a designated stock exchange • Guaranteed Investment Certificates (GICs) • Bonds • Certain shares of small business corporations www.mimitang.ca Mimi Tang Wealth Mgmt. & Consulting Ltd.

38. “In Kind” Contributions • Disposed of property for its FMV at the time of the contribution. • If the FMV is more than the cost of the property, a capital gain has to be reported on your income tax return. • However, if the cost is more than the FMV, the capital loss cannot be claimed. • The amount of the contribution will be equal to the FMV of the property. www.mimitang.ca Mimi Tang Wealth Mgmt. & Consulting Ltd.

39. www.mimitang.ca Mimi Tang Wealth Mgmt. & Consulting Ltd.

40. TFSA, RRSP, Non-RRSP TFSA RSPNon-RRSP Pre-tax income* $1,000 $1,000 $1,000 Tax (40%) 400 0 400 Net Contribution 600 1,000 600 20 years at 5.5% 1,151 1,918 707 Gross proceeds 1,751 2,918 1,307 Tax (MTR 40%) 0 1,167 0 Net Proceeds 1,751 1,751 1,307 Net annual after-tax 5.5% 5.5% 4% *Assumption: one time contribution www.mimitang.ca Mimi Tang Wealth Mgmt. & Consulting Ltd.

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43. QUIZ www.mimitang.ca

44. DON’T PUT ALL YOUR EGGS IN ONE BASKET! Mimi Tang Wealth Mgmt. & Consulting Ltd. www.mimitang.ca

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