T a x - F r e e S a v i n g s A c c o u n t s :

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1 T a x - F r e e S a v i n g s A c c o u n t s : A N e w F l e x i b l e, T a x - a d v a n t a g e d I n v e s t m e n t O p t i o n. Tax-Free Savings Accounts (TFSAs) are a new investment vehicle introduced in the 2008 Federal Budget that enables Canadians investment earnings and capital gains to grow tax-free. Depending on your life situation and earning power, a TFSA account can have different applications but it is suitable for a wide range of investor types and time horizons. This guide provides an overview of the TFSA and explores how it can provide you and your family with greater flexibility within your overall investment strategy. Copies of our client publications are available from your PH&N Investment Advisor or by calling or by visiting

2 Tax-Free Savings Accounts and You In 2009, Tax-Free Savings Accounts will only save Canadians $5 million in taxes, but by the year 2013 it is estimated that TFSAs will save Canadians an estimated $385 million. Over the next 20 years, savings are estimated to grow to $3 billion annually. Effective January 2009, you now have a new way to grow your savings. In the 2008 Federal Budget, the Government introduced Tax-Free Savings Accounts (TFSAs). These new tax-advantaged vehicles allow Canadian residents age 18 and older 1 to contribute up to $5,000 per year into an investment account where investment earnings and capital gains can grow tax-free. Used together with other tax-efficient savings vehicles, such as your registered retirement savings plan (RRSP), TFSAs can be a powerful tool. While investors receive no tax deduction using TFSAs, there are built-in features that make TFSAs flexible enough to meet both short- and long-term financial goals. Tax-Free Savings Account Highlights Individuals over the age of 18 1 can contribute up to $5,000 per year. You are not required to have earned income to contribute Income, dividends and capital gains that accumulate within tax-free savings accounts are never taxed (unless you overcontribute) Amounts can be withdrawn for any reason without being taxed You don t lose the contribution room if you make a withdrawal, but you do need to wait until the following year to re-contribute the money You can provide funds to your spouse for him or her to contribute to a Tax-Free Savings Account without being subject to income attribution rules If you don t contribute the maximum amount, you can carry forward unused contribution room indefinitely. For example, if you contribute $3,000 to your TFSA in 2009, your contribution room in 2010 will be $7,000 ($2,000 carried forward from plus $5,000 for 2010) Contributions are indexed to the consumer price index, to help adjust for cost of living. The TFSA dollar limit is $5,000 in 2009, and will be indexed to inflation and rounded to the nearest $500 in later years The power of tax-free compounding Here s a closer look at the long-term compounding power of the TFSA. Investing in a tax-free savings account, assuming a conservative 5% rate of return and an average tax rate of 21%, results in a savings of $19,625 over a 20-year period compared to the growth of taxable savings. $200,000 $150,000 $100,000 $50,000 $ The advantage of tax-free compounding $73,596 $100,000 TFSA } $19,625 in tax savings $53,971 $100,000 Non TFSA Is the TFSA right for you? Investment Income, including capital gains Total Contributions This example is based on 40% interest, 30% dividends and 30% capital gains, and a middle-income earning account holder with an average tax rate of 21%. It also assumes a constant $5,000 contribution over 20 years. How the TFSA fits into your financial plan will depend on your personal situation and goals. With more choice than ever, you will want to make sure you use the appropriate tax-sheltered solution for you. Your investment advisor can help you to evaluate the options available and help you make the choices most appropriate to your investment goals. 1 In British Columbia, New Brunswick, Nova Scotia and Newfoundland, the age of majority is 19 for account set up. 1 Phillips, Hager & North Investment Management

3 When electing between the use of TFSAs and similar vehicles such as RRSPs and Registered Education Savings Plans (RESPs), there are some important considerations to keep in mind: Deductibility of Contributions A contribution to an RRSP is deductible for income tax purposes, whereas a contribution to a TFSA is not tax deductible. This is a key advantage of the RRSP. Tax-Free Compounding For both RRSPs and TFSAs, investment income accumulates tax-free, and hence they are equally beneficial in this respect. Withdrawals Funds withdrawn from an RRSP are taxable as income, whereas withdrawals from TFSAs are not included as income. RRSPs are a good tool if your marginal tax bracket is higher during your working years as compared to your tax rate during retirement. As TFSAs are not taxed as income, they will not have an impact on income-based programs such as the GST credit, Guaranteed Income Supplement and Old Age Security payments. On the other hand, withdrawals from an RRSP could potentially have an impact on eligibility for these programs. Flexibility Arguably, TFSAs are the more flexible vehicle if investments are needed to fund short-term goals. For example, if you wanted to make a large purchase during retirement, drawing from a TFSA would not have a tax impact. On the other hand, withdrawing from an RRSP or Registered Retirement Income Fund (RRIF) would have tax implications as it is considered income. In the case of a RRIF, withdrawals above the specified minimum amount would be subject to withholding tax. However, RRSPs are still considered superior vehicles for saving for retirement and RESPs for funding a child s education. Each vehicle has advantages and disadvantages depending on your situation, so it is best to speak to your Phillips, Hager & North investment advisor. RRSPs can be used to purchase an individual s first home through the First Time Home Buyer s Program or to finance a return to school through the Life Long Learning Program. In both of these instances, however, the funds must be paid back within a certain time frame. In the case of a TFSA, there are no restrictions on when money is withdrawn, how it is spent and when it must be repaid. Unlike the RRSP, amounts withdrawn do not have to be repaid. Young investors are good candidates for investing in TFSAs. As young investors are likely not yet earning an income or earning very little income they would not yet be able to take advantage of the income tax offsetting benefits of RRSPs. TFSAs are a good vehicle for a young investor to save until such time as they earn more and enter into a higher tax bracket. TFSAs and RESPs RESPs and TFSAs are comparable as neither contribution is tax deductible. However, RESPs are sweetened vehicles for education saving purposes as contributions attract Canada Education Savings Grants of 20% or higher, up to a $7,200 lifetime limit per beneficiary. Withdrawals from RESPs, however, are subject to restrictions that govern the use and taxation of these vehicles. It should be noted that in the past two federal budgets, amendments have been made to improve the flexibility of RESPs in order to be more responsive to the changing needs of families and students. Another idea that parents and grandparents may wish to consider is only contributing to RESPs up until the child reaches age 17. As there are no more CESG grants after age 17, it may be worth considering switching to a TFSA to accumulate additional education-related savings. Estate Planning The TFSA loses its tax-exempt status after the death of the investor, meaning that the investment income will become taxable. However, a rollover opportunity is possible when the spouse or common-law partner becomes the successor. This will not be affected by the spouse s contribution room and will not reduce their existing room. Tax-Free Savings Account 2

4 Summary: When do I use a TFSA? For everyone Shelter highly-taxed income, i.e., bonds and foreign dividend-paying stocks After tax loss selling buy back the investment inside a TFSA to get tax-free benefit on its rebound (after the superficial loss period elapses) Contribute to your TFSA first, and your RRSP second, if your income is low today and expected to go up in later years Contribute to your RRSP first, and your TFSA second, if you are in a high tax bracket and expect to be in a lower tax bracket in retirement For young adults 18-year olds 2 can use a TFSA to save for their education since they don t get RESP grants after age 18 Save for a car, house or any other big ticket item Emergency fund While income is low, use the TFSA as a first retirement savings vehicle. Save RRSP room for later when income is higher. For individuals in peak earning years Income splitting contribute money to low-income spouse s TFSA with no attribution back to you Supplement RRSP invest your tax refund in a TFSA Supplement RESP to save for a child or grandchild s education Income smoothing (for people with variable incomes from year to year) to maximize tax deductions In lower income years, don t contribute to your RRSP to build up contribution room meanwhile, put money in a TFSA In higher income years, use TFSA assets to maximize carried-forward RRSP contribution room Set aside money in a TFSA to pay off a mortgage at the end of its term Estate Planning on death, TFSA assets transferred tax-free to a spouse s TFSA will not affect the spouse s contribution room Shelter private company shares (subject to complex rules, generally must be under 10% ownership. Please consult a tax professional on this option) For seniors / retirees Use TFSA as the first source of income before using RRSP/RRIF withdrawals you pay no tax on TFSA withdrawals Reinvest excess income or cash flow in a TFSA Minimize OAS clawbacks hold income-producing assets in a TFSA to reduce reported income Estate planning on death, TFSA assets transferred tax-free to a spouse s TFSA will not affect the spouse s contribution room TFSA Don ts Don t borrow to invest in TFSA interest cost on the loan is not tax-deductible Don t use TFSA for aggressive trading any capital losses incurred in a TFSA cannot be used to offset taxable gains from other investments. Getting started. Setting up a TFSA with PH&N 1) Contact your PH&N Investment Funds Advisor. 2) Complete a TFSA application form indicating the PH&N Funds and/or other securities that you would like to include in your TFSA account. 3) You will receive account statements and transaction confirmations as you normally would with an RRSP, RESP or other investment account that you hold with PH&N Investment Services. Advice at your fingertips Talk to your PH&N Investment Advisor, or consult your tax professional, to assess how a TFSA best fits your financial situation. 2 In British Columbia, New Brunswick, Nova Scotia and Newfoundland, the age of majority is 19 for account set up. 3 Phillips, Hager & North Investment Management

5 Frequently Asked Questions Q: How is a TFSA different from an RRSP? A: i. Withdrawals from a TFSA are tax-free and do not result in lost contribution room. ii. Contributions to a TFSA are not tax-deductible. iii. With a TFSA you don t need earned income to accumulate contribution room. iv. There is no requirement to convert the TFSA to an income payment option (i.e., RRIF) at any age. You can give money to your spouse to open a TFSA without being subject to the Canada Revenue Agency s (CRA) attribution rules. Q: What investment options are available for TFSAs? A: The investment options are similar to the investment options available for your RRSPs. For example: savings, GICs, mutual funds, stocks and bonds. Q: Can I transfer securities from another account to the TFSA as a contribution? A: Yes; however, like a transfer to an RRSP, it is done at market value and if you have a resulting capital loss, the transfer will be denied. In order to retain the capital loss you would need to first sell the security and then use the cash to contribute. Avoid the superficial loss rules by waiting 30 days before purchasing the same securities you sold at a loss. Q: Do I have to have a particular income level to take advantage of a TFSA? A: There is no minimum or maximum income level. Every eligible person will accumulate contribution room each year starting in Q: How much am I allowed to contribute per year? A: You can contribute up to $5,000 each year. With inflation, your contribution limit will increase in $500 increments (subject to government guidelines). Q: If I am earning no income, can I still make contributions to my TFSA? A: Yes. If you are eligible, you will accumulate contribution room each year even if you have earned no income. Q: What happens if I overcontribute for the year? A: Similar to an RRSP, a penalty will be assessed by the CRA of 1% per month on your excess contribution. Q: How will I know what my TFSA contribution room is for a given year? A: The CRA will track your contribution room. CRA intends to report this amount to individuals on their Notice of Assessment and through the My Account function on the CRA web site. Q: Is there a lifetime contribution limit? A: There will be no lifetime limit on the amount of your contributions. If you are eligible, you will accumulate $5,000 of contribution room every year, which will increase in $500 increments with inflation. Q: Can I withdraw the money I ve contributed to my TFSA for any purpose or for specific circumstances? A: You can withdraw amounts for any purpose. There are no restrictions. Q: How often can I withdraw from my TFSA? A: As often as you wish (depending on what you ve invested in) but some financial institutions may charge a withdrawal fee. There will be no withdrawal fees or annual administration fees with a TFSA from PH&N. Q: If I withdraw money from my TFSA, can I re-contribute this withdrawn amount later on in the tax year? A: Withdrawals you make in the current calendar year will be added to your unused contribution room. Amounts can t be re-contributed until the following calendar year or later. Q: Can I contribute to my spouse or common-law spouse s TFSA? A: You can give your spouse funds for them to contribute to a TFSA; such gifts will not be subject to CRA s attribution rules. Q: Can I open a joint TFSA account? A: No. Similar to registered retirement accounts such as RRSPs, government rules only permit individual accounts. Q: If I pass away, what happens to the income and capital gains of my TFSA? A: Earnings that accrue after the account holder passes away are taxable whereas earnings which accrued before death remain exempt. The tax-free status of the earning Tax-Free Savings Account 4

6 can be maintained provided the account holder names his/her spouse or common-law partner as the successor account holder. Q: Can I name my spouse or common law partner as a direct beneficiary? A: You can name you spouse or common-law partner as the successor holder of your TFSA. Upon your death, the successor holder will become the new plan holder and the TFSA will maintain its tax exempt status. Q: If there is a breakdown of a marriage or commonlaw partnership, what will happen to my TFSA? A: TFSA assets may be transferred between spouses or common-law partners on marriage or relationship breakdown but the transfer will not reinstate contribution room of the transferring spouse or reduce the contribution room of the receiving spouse. Q: Could I use my TFSA as security for a loan? A: Yes. Assets within your TFSA can be used as collateral for a loan. Please check with your financial institution to see if this is applicable. Information about the Tax-Free Savings Account is based on what is currently available from the Canadian government. 5 Phillips, Hager & North Investment Management

7 The TFSA at Work: A Case Study A strength of the TFSA is its flexibility. This makes it an ideal vehicle to fund a variety of expenditures throughout your lifetime. Here s a simple case study that illustrates how you can use TFSAs to finance a variety of goals. Assume that Eric started contributing to a TFSA at age 18. If he contributed $5,000 per year for six years, assuming a return of 5% per year, he would have $34,000 after six years. At age 24, after graduating from law school, he decides to take a trip to Europe and withdraws $20,000 of his TFSA savings. He would now have an extra $20,000 in contribution room. After returning from his trip, Eric starts his new job at a law firm. After four years, he is able to make up for his TFSA deficit by contributing $10,000 per year to the TFSA. At age 30, Eric marries Jane, also 30, who works at the same law firm. Eric and Jane withdraw $75,000 each from their TFSAs towards the down-payment on their new home. In the next decade, they are each able to contribute $10,000 per year to their respective TFSA to replenish the money they used for their down payment and continue saving for the future. When Eric and Jane turn 40, they decide to purchase a time share in Florida. They use $50,000 each from their TFSAs to purchase a share in an oceanfront condominium in Fort Lauderdale. And, in anticipation of funding their child s post-secondary education, between the ages of 41 and 47, Eric and Jane establish an RESP for their young child. After maximizing their RESP contribution to take advantage of the CESG grant, Eric and Jane contribute an additional $2,000 each per year to their TFSAs allocated for education-related expenses. When their child reaches university age, Eric and Jane are able to help fund their child s post-secondary education abroad at a U.S. university through a combination of RESP and TFSA withdrawals. The amount they each draw from their TFSA is $16,000 for four years. When Eric and Jane reach the age of 52, after their child s university education is complete, they continue contributing $15,000 each per year (by using a combination of current contribution room and previous years contribution room) until age 60 and then reduce their contributions to $12,000 each until age 65. The result is a nest egg of $1.2 million for retirement at age 65 all of which can be topped without tax consequences. With the money from their TFSAs, together with their RRSPs and other investments, they are able to fund a comfortable retirement. Note that contributions to their TFSAs do not interfere with RRSP or RESP limits. ($000 s) The TFSA at work over a lifecycle: Contribution activity from ages18-65 $40k (trip) Eric and Jane s TFSA Accounts Contributions (left-hand scale) Redemptions (left-hand scale) $10k $20k $20k Balance (right-hand scale) $150k (house) $24k $100k (time-share) $32k/yr (university tuition) $30k $24k ,250 1, ($000 s) This illustration assumes a 5% rate of return and a constant, $5,000 contribution limit for TFSAs. In reality, the TFSA limit is indexed to inflation, making the amount of sheltering even greater. For simplicity in this case, it is assumed that Eric and Jane begin contributing at the same time and make the same contributions and withdrawals.

8 Phillips Hager & North Investment Management (PH&N) is an operating division of RBC Global Asset Management Inc. (RBC GAM), an indirect, wholly-owned subsidiary of Royal Bank of Canada. RBC GAM is the manager and principal portfolio advisor of the PH&N Funds. The principal distributor of the PH&N Funds is Phillips, Hager & North Investment Funds Ltd. (PH&NIF), which uses the business name Phillips, Hager & North Investment Services. PH&N and Phillips, Hager & North are registered trademarks of Royal Bank of Canada. PH&N Investment Services is a trademark of Royal Bank of Canada. Used under licence. Copyright RBC Global Asset Management Inc., Publication date: January 19, 2009 PH&N Investment Services V A N C O U V E R Waterfront Centre 20th Floor 200 Burrard Street Vancouver, British Columbia Canada V6C 3N5 V I C T O R I A St. Andrew s Square I Suite Yates Street Victoria, British Columbia Canada V8W 1L6 C A L G A R Y Alberta Stock Exchange Tower Ave S.W. Calgary, Alberta Canada T2P 3C4 T O R O N T O 155 Wellington St. West 21st Floor Toronto, ON M5V 3K7 M O N T R E A L Tour McGill College Suite McGill College Avenue Montreal, Quebec Canada H3A 3M8 I N V E S T M E N T F U N D S A D V I C E & I N F O R M A T I O N Telephone: Facsimile: Website: info@phn.com