TFSA, tax changes: It's time to review your financial plan

TFSA, tax changes: Time to review your financial plan

By Special to MoneySense on December 21, 2015
Estimated reading time: 3 minutes

Getting a rate cut? Claim the deduction against your 2015 income

This article is 6 years old. Some details may be outdated.

OTTAWA – The tax rules are changing in 2016 and even if Canadians don’t make enough to be hit by the new top federal income tax rate, their financial plans are going to need to be reviewed. The vast majority of Canadians will not be affected by the new tax bracket for income over $200,000 a year, but everyone will see their tax-free savings account contribution limit be reduced back to $5,500 for 2016. Combined with the new lower tax rate for income between $45,282 and $90,563, even those who aren’t in the top one per cent of income-earners should take a look at their finances to ensure they’re on track. Peter Bowen, vice-president of tax and retirement research and solutions at Fidelity Investments, says for many people this might be the most important tax planning season they’ve ever had. “With the changes just implemented both to tax rates and TFSAs, everybody needs to take care to make sure their tax planning is right for their own situation,” he said. “We always encourage people to get financial advice, but with these changes in place, it is more important than ever.” What you need to do depends on your tax bracket — and with the wider range of brackets now, that means planning is more complex. For those in the bracket that is seeing the rate cut, Bowen says to be sure to claim the deduction against your 2015 income to maximize its value if you’re planning on making an RRSP contribution. However, those who make more than $200,000 may want to delay claiming their RRSP contributions until 2016 due to the higher rate set to take affect. EY tax partner David Steinberg says those making more than $200,000 may also want to look to maximize their 2015 income by crystallizing any capital gains or taking any bonuses or deferred income that may be due before the new higher tax rate kicks in. “I think you’re going to see a lot of people managing taxable income,” he said. Bowen also advises Canadians to carefully consider their future financial needs when weighing TFSA and RRSP contributions. How much will you be making throughout your career, what stage are you at in your career and where will you be in retirement? Those are all matters to ponder, he said. “These are the questions that people need to be prepared to at least think about because then that decision of using an RRSP or using a TFSA becomes more important,” Bowen said. The benefit of an RRSP is that you deduct contributions today and defer taxes until your retirement, when you will likely be earning less money and may be in a lower tax bracket. In contrast, TFSA contributions don’t generate a tax deduction, but any investment income you earn with the money isn’t taxed. So, if you think you’re going to be in the same or higher tax bracket, putting money into a TFSA might make more sense. Why there’s no rush to stuff your TFSA » Bowen noted it isn’t just high-income earners that will be hurt by the lower TFSA limits. Retirees looking to shelter a portion of their nest egg from tax will also be affected by the lower contribution limit even though they may fall into the low-income category. “They don’t have to be wealthy to benefit from TFSAs,” he said. The tax changes and TFSA rollback were part of the Liberal campaign platform during the federal election. The cut to the second tax bracket will save Canadians making less than $200,000 up to $679 per person. In addition to the rate changes, the Liberals ended the controversial income-splitting scheme for families plan put in place by the Conservatives that will see taxes rise for families where one parent earns significantly more than the other. And more changes are expected. The Liberals have promised a child benefit program to replace the universal child care benefit starting in July 2016. The plan, promised during the election, will see more generous benefits for poor families and the amount reduced as family income rises, and will be entirely eliminated for high-income earners. Get money fit in 2016. Here’s how »

Comments Cancel reply

Budgeting

What is the Canada Carbon Rebate?

Learn about Canada’s carbon tax, launched in 2019 and ended in 2025.

What is the Canada Carbon Rebate?

Phone showing a screen of the Wealthsimple app where you can trade stocks, such as APPL

Investing

Wealthsimple Trade in-depth review 2025: The pros and cons of investing on this app

Is it easy to buy and sell stocks and ETFs? Is it safe for Canadian investors? Find out the...

Wealthsimple Trade in-depth review 2025: The pros and cons of investing on this app

Debt

Should I use retirement savings to pay off credit card debt?

A Canadian DIY investor is wondering if they should hire a planner.

Financial Planning

Do you need a planner if you’re a DIY investor?

The hidden costs of doing it alone: Why Canadian DIY investors should consider guidance from a professional planner.

Do you need a planner if you’re a DIY investor?

A woman reads financial documents on her couch

Ask a Planner

How does a U.S.-dollar TFSA work?

If you have tax-free savings accounts in Canadian and U.S. dollars, here’s how to avoid overcontributing.

How does a U.S.-dollar TFSA work?

A woman checks her accounts on her phone

Taxes

How to set up CRA direct deposit

Direct deposit puts tax refunds, benefits and other government payments into your bank account faster. Here’s how to sign...

How to set up CRA direct deposit

A Canadian single woman at work, looking at her investments on her phone.

Investing

How women can start investing

You have a lot of financial responsibilities—and you’re managing them all on your own. But how are your investments...

How women can start investing

Education Money

Contributing to your grandchild’s RESPs: What grandparents need to know

Helping a grandchild pay for post-secondary education is a smart gift that keeps giving. Here’s how to maximize your...

Contributing to your grandchild’s RESPs: What grandparents need to know

Two young kids in winter clothes smile and stick out their tongues

Education Money

You opened an RESP—now what?

A registered education savings plan is the best way to save for a child’s education. Here’s how to use...

You opened an RESP—now what?

Education Money

Reducing risk in an RESP: How to invest as your kid approaches college or university

An RESP’s investment mix should evolve over time. Here’s how to focus on growing and then preserving your savings...

Reducing risk in an RESP: How to invest as your kid approaches college or university

TFSA, tax changes: Time to review your financial plan

Comments Cancel reply

Related Articles

What is the Canada Carbon Rebate?

Wealthsimple Trade in-depth review 2025: The pros and cons of investing on this app

Should I use retirement savings to pay off credit card debt?

Do you need a planner if you’re a DIY investor?

How does a U.S.-dollar TFSA work?

How to set up CRA direct deposit

How women can start investing

Contributing to your grandchild’s RESPs: What grandparents need to know

You opened an RESP—now what?

Reducing risk in an RESP: How to invest as your kid approaches college or university