From The Boomer & Echo Mailbag: Opening A TFSA For A Child
Q. I would like to open a TFSA for my daughter, but I want to have control of it until she becomes more responsible with money. Is this something I can do?
It’s great that you want to help out your daughter. You’re part of a growing trend of parents giving their children a financial boost.
The benefits and flexibility of a TFSA make it an ideal solution to save for multiple financial goals.
Nevertheless, there are a few issues with your plan to open a TFSA for your child.
Opening a TFSA for a Child
First of all, you don’t say how old your daughter is. By law, a person can only set up a Tax Free Savings Account once they’ve reached the age of majority for their province.
Age of majority is:
- 18 – in Alberta, Manitoba, Ontario, Prince Edward Island, Quebec, and Saskatchewan.
- 19 – in British Columbia, New Brunswick, Newfoundland & Labrador, North West Territories, Nova Scotia, Nunavut, and Yukon.
TFSA contribution room starts to accumulate at age 18, though. So, if your daughter turned 18 this year and lives in, say, Ontario, she can contribute $5,500 this year and $5,500 next year.
However, if she lives in British Columbia, for example, she has to wait until next year to contribute $11,000. This, unfortunately, results in a loss of one year of tax-sheltered growth of the investments held in the account.
The TFSA must be opened in your daughter’s name and the account will belong to her. You can’t actually contribute to someone else’s TFSA, but you can gift money to adult children, so they can make their own contributions. The income earned is not attributed back to you as with non-registered accounts. Your contributions will help her accumulate savings.
You can show your child the importance of establishing a savings habit. Sometimes, promising to match her contributions will encourage her to save and help her accumulate more savings.
The risk? There is absolutely nothing to prevent your daughter from withdrawing the money in the account, because technically, this would be her money.
If you are concerned about control, you’ll need to set up a “living trust,” but that’s a whole other post.
Since I have TFSA room, I recently opened two, new TFSAs with modest monthly deposits, but for our grandkids. I wanted to have complete control, wanted to get some long- term growth , and didn’t want their parents to know I was doing this. I am playing a bit of catch-up since I just got this idea a couple of years ago.
Someday—my wife and I will decide when—we’ll hand the $ over—might be to help out with post secondary education, or perhaps a graduation or wedding gift.
If the parents (or grandkids) don’t know, is there a possibility one or both of them may also open a TFSA for the grandkids and thus inadvertently contribute over the yearly allowable limit which would incur a penalty to the grandkids?
The TFSA would be in Tom’s name, so Tom would have to be careful not to go over his limit. He would just pass on the funds at a time when he thought it was appropriate.
If you die, the money will simply be treated as part of your estate
One other thing to consider is when the granddaughter is involved in a relationship that becomes a common law relationship. The money in the TFSA may be impacted when the relationship breaks down.
It wouldn’t be impacted as long as Tom keeps the money in his TFSA. As far as the government is concern, that money is Tom’s, until he gives it away.
I don’t understand what the difference is in opening multiple TFSA? Managing one still gives you the control to give any amount to the grandkids and at the same time gives you better control in not exceeding your limit.
Also, correct me if I’m wrong, say you accumulate $100,000 in your TFSA and you now decide you want to give each grandchild (assuming there are only 2 of them) $50,000, wouldn’t there be a gift tax they would have to pay on anything over $10,000?
Hi Gert. There is no gift tax in Canada. If money is gifted to a spouse or minor child you will be taxed on the income earned if the money is invested in a non-registered account. Spouses and adult children can, however, contribute the gift money to their own TFSA if they have enough contribution room with no attribution back to you.
you say one can give funds to one’s children to put in a TFSA in their own name. Can I give funds to my spouse to put in a TFSA in her name or does it need to be her own money?
You can give money to anyone you want so they can place it in their TFSA, so long as they are 18 or over and have not over contributed. Do a search for TFSA rules and you’ll find everything you need to know.
Also, say your wife has not maxed out her contribution and has room from years past, you make contributions from past years as well.
From Tangerine website https://www.tangerine.ca/en/products/investing/tfsas/tax-free-savings-account/index.html
“As of January 1, 2016, all Canadian residents who are at least 18 years of age can contribute up to $5,500 annually†† (as a combined total for all TFSAs held at all institutions). Up to $10,000 of unused contributions can be carried over from 2015, up to $5,500 per year from 2013-2014, and up to $5,000 per year from 2009-2012.”
The only benefit of a TFSA is to tax shelter its returns. Another vehicle with much the same benefit that leaves you control is to put the money into a Segregated Fund which is insured. The granddaughter can be the beneficiary (so she gets it should you die before you are ready to give it to her). An equity based seg fund will minimize taxes on growth, while the capital is guaranteed at maturity. You continue to own the seg fund in the meantime until you decide to transfer ownership; do not believe their are any tax implications. The cost is minimal, only a few extra basis points on the MER, and keep that minimal by using an ETF base seg fund.
The question is pretty clear. The asker want to gift his daughter money to help with future financial goals, but doesn’t want her to be tempted to make immediate withdrawals to buy the latest iPhone or manolo blahniks. He wants her to learn to save responsibly. He asks about opening a TFSA in her name because he doesn’t want to pay tax on any investment returns, and he doesn’t want her to wait until he is dead to get the money, so your advice won’t work for him.
Tom’s strategy also is not suitable for him because he wants to use his TFSA contribution room for his own financial requirements.
Gert’s comment from the Tangerine website about contribution room would only be applicable if the daughter was 26 or older this year.
I disagree. Seg fund have very high MERs (up to 3%) due to having to pay for the insurance component, along with other fees. The tax advantages are overwhelmed by these high fees. I think it’s nearly always a bad idea to mix investments with insurance.
Another consideration in BC is to have your child name you and your partner as an irrevocable beneficiary.. For additional protection from creditors or marriage breakup, look into setting up a demand loan signed by your son or daughter for the amount you funded. There are many strategies etc….
Boomer, my comment with Tangerine was directed at Ian’s question about his wife.
However, you bring up an interesting thought. The daughter would have to be 26 to benifit from all past contribution. My question is, she would have had to be 18 in 2009 in order to go back and not have contributed over the years to have the right to deposit missed contributions, correct?
If a daughter turns 18 this year she can only contribute $5500 but not go back as per the Tangerine blurb, correct?
That’s right Gert. Past contribution room goes back to 2009 or age 18 for those born after 1991.
Marie, if I’ve maxed out my TFSA and RRSP, can I gift money to my spouse for both without tax consequences? I understood that’s OK for the TFSA but not the RRSP, although I don’t really understand why the difference.
Hi Grant. I have found nothing to indicate that you can’t gift money to your spouse for both TFSA and RRSP as long as she has contribution room. The RRSP tax deduction would go to her.
Theoretically, if the tax man came calling when she started making withdrawals in the future, you would no doubt say you paid all the household expenses during that time and she saved her money.