Safest Banks: Is Canada in the Top 10?

We generally believe, living in Canada, that we have the safest banking system in the world. Certainly we’re in the top 10, right?

It depends on who does the ranking, it seems. Global Finance Magazine, for example, did its 23rd annual ranking in September of 2014. Not one of the Canadian banks made the Top 10; but TD Bank Group did make spot #11 as the highest ranked Canadian bank in 2014 and continued that ranking in the first quarter of 2015, by the same organization.

How safe is the money in your Canadian bank accounts? According to Wikipedia, there have been 43 bank failures since 1967, and none since 1996. So the answer is, very safe.

In addition, the Canada Deposit Insurance Corporation (CDIC) was established in 1967 to guarantee investments up to $100,000 in savings, chequing and Guaranteed Investment Certificates (GICs) as well as term accounts with maturities of five or fewer years. Also covered are money orders, bank drafts and travellers’ cheques, provided your bank or financial institution is a member of CDIC.

What deposits are not guaranteed by CDIC? Notably, credit unions and caisse populaires are not covered by CIDC, as they are provincially backed; nor are deposits in foreign currencies. Bonds, treasury bills, mutual funds and individual stocks are not insured, whether held in TFSAs, registered or non-registered accounts; nor are term deposits of more than five years.

The institution you deposit money to must be a member of CIDC, and a list can be found on their website:

Is $100,000 the maximum you can be covered for, no matter how much you have on deposit with one bank? The $100,000 of insurance coverage applies per account you hold at an institution. So, you can hold accounts in your individual name, jointly with someone else, in trust, in a registered account or in a separate account holding money to pay realty taxes, for example, and each one will be covered up to $100,000. The 2014 Federal Budget announced a comprehensive review of the deposit insurance framework to ensure it is adequate for Canadian savers; however, the 2015 budget made no further mention of this.

How probable is a bank failure in Canada? It’s not very likely. While Canada did not make the Top 10 list in Global Competitiveness, the World Economic Forum has ranked Canadian banks as the most sound in the world for the seventh consecutive year in its Global Competitiveness Report 2014-2015. It’s something to be cherished by investors in an uncertain world.

Top 10 Reasons the TFSA Rocks!

Despite political controversy, the TFSA has gained broad-based acceptance by 40% or 11 million average Canadians.

More than 80% of all TFSA holders have incomes of less than $80,000, according to the April 21, federal budget documents. The opportunity now, is to take advantage of the immediate increase in the TFSA maximum contribution limit to $10,000 in 2015 and subsequent years.

In case you need any more convincing about the virtues of a tax free savings vehicle for family wealth creation, here are my top ten tax reasons why you shouldn’t miss taking a closer look at maximizing your TFSA investment:

Reason 1 – Family Income Splitting: There is no attribution rule attached to the TFSA because resulting income is tax exempt. So this is a great opportunity for parents and grandparents to transfer $10,000 each year to each adult child in the family—for the rest of their lives. Recipients can take the money out, tax-free, for whatever purpose they wish and create new TFSA contribution room in the process. That is, they can take withdrawals and, once they have accumulated new savings, can put those amounts back in future years to grow.

Reason 2 – New Tax-Sheltering Opportunities for RRSP Age-Ineligible Taxpayers: The RRSP tax shelter can continue for those who reach age 71 and have to convert their RRSP to a RRIF or annuity. Even if they don’t need the money, they are forced to take in withdrawals. Amounts not needed for their living expenses can be reinvested into a TFSA, allowing those tax-paid funds to grow again—and faster—in a tax-sheltered account, as opposed to a non-registered account.

Reason 3 – Benefits for Single Seniors: RRSP Melt-Down Strategy Enhancements. It has always made some sense to melt down RRSPs, converting to a RRIF or annuity and taking withdrawals, to “top income up to bracket” in circumstances where taxes will be higher at death than during life. We generally use that strategy for singles or widow(er)s for example. Now those surplus funds can be deposited into a TFSA so that retirees can continue to build wealth on a tax-free basis and keep legacies intact.

Reason 4 – Avoid High-Income Tax Brackets and Surtaxes: Savings within a TFSA are also a great way to reduce ongoing income tax burdens and taxes payable on death of a surviving single taxpayer. During life, untaxed RRSP accumulations do not qualify for income splitting in the hands of the surviving spouse. As a result, withdrawals can quickly be taxed in higher-income tax brackets now popular with provincial governments. Withdrawing some of these tax-sheltered accumulations before death (at lower tax brackets) and reinvesting in a TFSA can help to limit high tax obligations for the surviving spouse and ultimately for family heirs.

Reason 5 – Estate Planning Considerations: Note that the TFSA loses its tax-exempt status after the death of the plan holder, meaning the investment income earned after death will become taxable. However, a rollover opportunity is possible when the spouse or common-law partner becomes the successor account holder. This rollover will not be affected by the spouse’s contribution room, and will not, in turn, reduce their existing room either. In the case of a taxpayer dying without a spouse, the plan assets should be transferred to another appropriate savings vehicle.

Reason 6 – Homebuyers: TFSA or HBP? In the market to buy a first home? Consider whether it makes more sense to withdraw funds on a tax-free basis from within an RRSP to fund a new home purchase under the Home Buyers’ Plan, or to save the required funds in a TFSA instead and withdraw them from there when needed. There are no tax penalties for failure to pay back the funds to the TFSA (as there are with the RRSP), and withdrawals automatically create new TFSA contribution room, so our vote would be to accumulate money in the TFSA savings vehicle for the purposes of saving for a home instead of tapping into the RRSP.

Reason 7 – Later-Life Students: TFSA or LLP? The source of education savings should now be revisited as well, for similar reasons. Saving within the TFSA allows you to accumulate funds on a tax-deferred basis and then withdraw them without penalty or a requirement to repay the funds. This is not so under the Lifelong Learning Plan, which allows for a tax-free withdrawal from the RRSP but requires an annual repayment schedule. The avoidance of income inclusion penalties therefore makes the TFSA a more attractive withdrawal vehicle for later life students. Better to leave the funds in the RRSP for tax-deferred retirement savings.

Reason 8 –Education Savings for Minors: TFSA or RESP? Despite giving up Canada Education Savings Plan Grants and Bonds, the TFSA may appear to be a better savings vehicle for education purposes than the RESP. The latter could eventually attract a significant tax penalty on withdrawal if intended recipients do not end up going to school. Do the projection math to better understand how to manage this risk.

Reason 9 – Bolster Tax-Assisted Pension Contribution Limitations: Those who have contributed the maximum to an RRSP—18% of last year’s earned income to this year’s specific dollar maximum—and want to do more to supplement their savings on a tax-assisted basis, can now do so using an enhanced TSFA contribution maximum. This is particularly important for those who don’t have an employer-sponsored pension plan or the self employed.

Reason 10 – Supplementing Executive Pension Funding: Contributors to employer pension plans are often precluded from making RRSP contributions because of their pension adjustment amount. The TFSA now gives these people the opportunity to tap into another tax-preferred savings opportunity. This is particularly important also for executives who earn more than the annual dollar maximum. The TFSA provides a small window of opportunity to shore that tax assistance up. This option should be used first and then in conjunction with planning for funding of top-hat plans like Individual Pension Plans or Retirement Compensation Arrangements.

Lucrative Tax Claims: Medical Travel and Home Modification Costs

Tax season is officially over for most individuals, and that signals the start of tax audit season.

One of the most common problem areas is medical expenses, especially because claims incurred for medical travel and modifying your home to accommodate a disabled person can be quite lucrative. But you’ll need to know what documentation to keep to satisfy the tax auditor.

Travel Expenses for Medical Reasons

A taxpayer may claim travel expenses for the patient and one attendant who must travel 40 km or more to receive medical services not available in their community. If the taxpayer is required to travel more than 80 km from their place of residence, then travel expenses may include hotel and meal costs. Actual receipts can be used for costs of travel including gas, hotel and meals.

Alternatively, you can claim vehicle expenses using a simplified method based on a rate per kilometre. This method does not require receipts to be kept for vehicle expenses, only a record of the number of kilometres driven. Interesting tax trivia: If more than one province is involved, the rate is calculated based on the province in which the trip began.

Home Modifications as Medical Expenses

The incremental costs of building a new home, or modifying an existing home, for a patient who is physically impaired or lacks normal physical development can be claimed, but only where those costs are incurred to enable the patient to gain access to, or be functional within, the home. However, the CRA does provide a pre-cautionary note: the expenditure must not be of a type simply intended to increase the value of the home, or include an expense that would not typically be incurred by someone who was not impaired. There are three other types of claimable expenses you may wish to take note of:

Driveway Alterations – If a person with a mobility impairment alters the driveway of their residence to facilitate access to a bus, those costs can be claimed.
Van Adaptations – An individual who requires a wheelchair can claim the lesser of $5,000 or 20% of the cost of a van that has to be adapted for transportation.
Moving Expenses – For a disabled person to move to a more suitable dwelling, to a maximum of $2,000.

In the latter instance, don’t forget that the disabled person becomes a “first time” homebuyer for the purposes of the RRSP Home Buyers’ Plan; that is, if alternative accommodations must be acquired as a result of the disability. This will allow the family to tap into RRSP funds tax-free if they have to move from a two-storey house to a bungalow, to accommodate new mobility needs, for example

When it doubt, consult with a DFA – Tax Services Specialist. This is a wise move that can unlock the door to new money to help pay for some of these expensive costs of lifecycle change.