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Funding home renovations with TFSAs

Are you dreaming of a gourmet kitchen? How about a spa bathroom or state-of-the-art media room? If you are, you’re likely among the many Canadians facing the “move or improve” decision.

Kelly and Taylor, a Halifax couple with two children, agonized over their decision to stay in their three-bedroom home. “We shopped around but a move-in-ready home in our neighbourhood is out of our price range,” said Kelly. After more than a year of searching, they finally decided to update the kitchen and remodel the basement to make their current home better suit their family’s needs.

“It’s a big decision but we knew a few years back that, either way, we needed to start saving,” said Taylor. The couple placed their investments in Tax-Free Savings Accounts (TFSAs) – both contributing the maximum-allowable amount to their individual accounts. The good news for Canadians in similar situations is that the federal government increased the maximum by $4,500 in 2015. You can now contribute $10,000 annually to a TFSA, plus you can carry forward unused room from previous years.

TFSAs are an excellent option when saving for home renovations because the investment income you earn and the withdrawals are tax free. Kelly and Taylor can take out as much as they need, at any time, without tax or repayment requirements. And the withdrawals won’t affect their eligibility for tax benefits and credits, such as the Canada Child Tax Benefit (CCTB) and the Goods and Services Tax/Harmonized Sales Tax (GST/HST) credit. In fact, a withdrawal will create more contribution room. Kelly and Taylor can re-contribute the money they take out for the renovation without affecting the room they automatically accumulate each year. It’s important to note though that re-contributions are included in the annual contribution total so, to avoid exceeding the limit and incurring a penalty tax, you may need to wait until the following year.

TFSA fast facts

  • Canadian residents aged 18 and older are eligible to contribute – beyond that, there are no age restrictions for contributions or withdrawals.
  • Contributions are not deductible for income tax purposes (like in an RRSP) and investment income earned in a TFSA is not taxed, even when withdrawn.
  • In 2015, the annual maximum contribution amount increased from $5,500 to $10,000.
  • Unused contribution room is carried forward and accumulates for future years.
  • Funds can be withdrawn at any time, for any purpose.
  • The full amount of withdrawals can be re-contributed in future years.
  • Spouses and common-law partners can provide funds to invest.
  • TFSA assets can generally be transferred to a spouse or common-law partner upon death.

TFSAs are a flexible and tax-efficient way to save for home renovations. The easiest way to grow your nest egg is to make monthly contributions. If you’re considering a home-improvement project, talk to us about the type of TFSA that’s best for you. Your professional advisor can help you turn your current home into your dream home.

October 20, 2015

This column, written and published by Investors Group Financial Services Inc. (in Québec – a Financial Services Firm), and Investors Group Securities Inc. (in Québec, a firm in Financial Planning) presents general information only and is not a solicitation to buy or sell any investments. Contact your own advisor for specific advice about your circumstances. For more information on this topic please contact your Investors Group Consultant.