Ever since the federal government introduced the tax-free savings account in its budget in February, financial planners and tax experts have been developing strategies that Canadians can use to take advantage of the new vehicle for sheltering savings.

The TFSA, which allows holders to contribute funds and shelter investment income and growth from taxes, is so flexible that there seems to be an almost unlimited number of strategies for using it effectively. There also appears to be no reason for a Canadian not to have a TFSA as part of his or her financial plan.

“In five or 10 years,” says Jason Safar, partner in the tax services practice with Price-water-houseCoopers LLP in Mississauga, Ont., “TFSAs will be as integral or, perhaps, even more relevant to some people’s financial planning than RRSPs or RESPs.”

This tax season and beyond, clients will be looking for help in understanding what a TFSA is and how it can be integrated into their financial plans. And advisors should understand how the new account can be used by clients in every tax bracket and at every stage of life.

Perhaps most obvious, any Canadian who already has investment savings in a non-registered account should move at least some of those assets into a TFSA, in which any investment income or gains will be sheltered from taxes. For example, a client who has used his or her RRSP contribution room could use the TFSA as another vehicle to shelter investment income.

Some individuals and families will consider using TFSAs to hold their emergency funds, says Jamie Golombek, managing director of tax and estate planning with CIBC Private Wealth Management in Toronto.

In the past, individuals have often been reluctant to set aside the recommended three to six months of living expenses in an emergency fund; they didn’t want a pool of cash earning low interest that is subject to taxes. Instead, these clients would have chosen to open a line of credit for emergencies.

But earnings on funds held in TFSAs are tax-free. And because contributions to the funds are made with after-tax dollars, withdrawals, which can be made at any time, are also tax-free. TFSAs are well suited to hold emergency savings.

Also, families with young children can use a TFSA instead of an RESP to save for a child’s education — at least, through the child’s earliest years, says Dave Ablett, senior tax and retirement specialist with Investors Group Inc. in Winnipeg.

With an RESP, if a child doesn’t attend a post-secondary institution, and if the parents don’t or can’t name another eligible beneficiary, the Canada education savings grants paid into the RESP have to be repaid. And if the RESP had generated earnings, the parents are liable for taxes on that income. (See story on page B12.)

“A lot of young families might say, ‘Why don’t we contribute to a TFSA, while we get a sense of whether the child is likely to go to university’,” Ablett says. “Later, they can start to divert their education savings to an RESP. Because of the carry-forward, if the RESP starts no later than the child’s 10th year, the parents will be able to get all of the grant money available.”

Conversely, Ablett says, if parents have been contributing to an RESP since a child’s birth, once they have obtained all the grants available, they can use a TFSA to continue to save for the child’s education.

Some clients might choose to use a TFSA in a leveraged investment strategy. TFSAs can be used for collateral for a loan without any tax penalty — a notable advantage over RRSPs. Using an RRSP as collateral would require that the value of the RRSP be added to the client’s taxable income for that year.

Safar suggests a TFSA leveraging strategy could work like this: your client puts $5,000 into a TFSA and invests it in a high-quality fixed-income instrument, something against which financial institutions would be comfortable lending. Your client could then arrange with a financial institution for an interest-only loan of $5,000, which your client invests in equities.

Your client, at the end of the year, would enjoy a number of benefits, Safar says. He or she could claim an interest deduction on the $5,000 borrowed; earn tax-free interest income on the $5,000 in the TFSA; and have $5,000 invested in equities. If the investment is successful, the $5,000 in equities would generate earnings that are higher than the cost of borrowing.

@page_break@“The client has increased the amount of money he or she has in the marketplace,” Safar says, “and has done it in a tax-efficient manner.”

Leveraging against a TFSA will make more sense in future years, when clients have built up larger amounts of money in their TFSAs and can take advantage of leveraging opportunities on a larger scale.

For low-income Canadians, making a contribution to a TFSA can be preferable to making contributions to an RRSP. Being in lower tax brackets, they may not benefit from the tax deductions on RRSP contributions. Future RRSP or RRIF withdrawals might then reduce the amount of income-tested benefits they would otherwise receive.

Withdrawals made from a TFSA, Ablett says, won’t affect the national child benefit, guaranteed income supplement or old-age security benefits.

The TFSA is also a useful vehicle for clients who have limited opportunities to contribute to an RRSP, such as those who have pension plans with their employers and, therefore, have reduced RRSP contribution room. “Those people can use the TFSA to augment their pension savings,” Ablett says.

This also holds true for self-employed clients who have reached the age of 71 and can no longer contribute to an RRSP.

“With the TFSA,” adds Ablett, “there is no age limit to contributing, and you are still generating room every year.”

Even though the TFSA is a flexible savings program, most tax experts believe contributing to an RRSP will still take precedence over contributing to a TFSA for most clients. That’s because most people would benefit from the tax deferral they receive when contributing to the RRSP. As they’re likely to be in a lower tax bracket in retirement, RRSP or RRIF withdrawals made then will, in most cases, be taxed at a lower rate than those after-tax funds put into a TFSA. IE