How to Protect Your Home’s Equity from the Grasp of the Canada Revenue Agency

egg How to Protect Your Home’s Equity from the  Grasp of the Canada Revenue AgencySo you have sold the family home and moved into an apartment or a retirement community. Now the next big question is where to invest the proceeds of sale to produce an income and minimize taxes. While the actual equity from the home sale isn’t taxable, any interest, dividends or capital gains you earn by investing the equity can be taxable.

There are many investment options and you should do your own independent research as well as talking to a qualified financial planner. There isn’t a “one size fits all” solution and what’s best for you will be determined based on factors such as age, risk tolerance, health, overall financial situation and other factors.

However there is one investment option that I believe is an excellent choice for just about every retiree. The Tax Free Savings Account. Created in 2009 they are ideally suited to invest the proceeds from the sale of your Halifax home. Here’s a couple of the key benefits:

All money within a TFSA grows tax free. And no tax is payable upon withdrawl. The TFSA can hold a variety of investment vehicles including GICs, stocks, bonds, mutual funds, exchange-traded funds, etc. The exception is you may have to pay tax on dividends if you have foreign stocks.

Annual contributions began at $5000 per person per year and as of 2013 was increased to $5500. Any year that you do not contribute, your contribution room carries forward indefinitely. As of 2015 the total allowable contribution is $36,500 per person.

And you are not penalized for withdrawals. If you withdrew $2000 in 2014 you would have regained the $2000 contribution in the following year (2015). Therefore in 2015 you could contribute a total of $7500.

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Neither income earned within a TFSA nor withdrawals from it affect eligibility for either Old Age Security or the Guaranteed Income Supplement.

You can’t have a joint TFSA but each spouse can have their own. You can name your spouse as successor holder and upon your passing the account passes tax free to your spouse. Your spouse will continue to be able to contribute annually to their own plan.

Unlike RRSP’s where you must stop contributing at age 71, TFSA’s do not have an age limit. You can contribute to them your entire life.

So here’s why I like TFSA’s so much as a way to tax shelter the proceeds from the sale of your home: John & Mary have sold their home and have $300,000 in cash to invest. Assuming neither one has money already in a TFSA they can each immediately contribute $36,500 ($73,000 in total) to their TFSA’s. And every year they can each add another $5500 (more as annual limit is increased).

Over the next 10 years John and Mary will be able to contribute an additional $110,000 (plus any limit increases) to their TFSA’s. A total of $183,000 plus limit increases has been tax sheltered over the 10 year period. This allows retirees an option to tax shelter a substantial amount of the house sale proceeds over time.

Since you will be taxed on all pension income and RRSP withdraws it make sense to move as much of your investments into Tax Free Savings Accounts as possible to eliminate income tax on those funds. I strongly recommend you take advantage of the TFSA when investing the equity of your home, but do so as part of your overall investment strategy and seek advice from qualified advisors.

If you have any questions please contact myself or your investment advisor.

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smroy How to Protect Your Home’s Equity from the  Grasp of the Canada Revenue AgencyRoy Thomas SRES® (Senior’s Real Estate Specialist) is a REALTOR® with Sutton Group Professional Realty. Since 1991 Roy specializes in helping retirees with their later in life real estate transactions. If you are contemplating a move and would like a complimentary copy of Roy’s guide to downsizing entitled “Preparing to Downsize” please click here.