Tax-Free Savings Account (TFSA)

According to the Government of Canada 2008 Budget, the TFSA will allow Canadians to watch their savings grow tax-free throughout their lifetimes. Starting on January 1, 2009 Canadians will be able to contribute up to $5,000 every year to their TFSA and carry forward unused room to future years. That’s why it’s important to open your new TFSA as soon as possible, even if you don’t use it right away. There is no lifetime limit and no tax on investment income earned, including capital gains. It can be used any way you like—for example, to buy a car, pay for an emergency, finance a child’s education or bankroll a family vacation.

Because you are allowed to save or invest money without paying tax on the income it earns and you can also withdraw it tax free, your savings account will grow faster than before.

To be eligible for a TFSA, you must be at least 18 years of age, hold a valid Social insurance number and be a Canadian resident. The contribution limit will be set at $5,000 annually but the limit will increase based on the inflation rate. A good thing is you can also contribute to your spouse’s TFSA.

Your funds can be removed at anytime, however this account may carry withdrawal fees. Unlike RRSPs, there is no repayment rule and the money taken out may be put back later. Your withdrawals will not be included in your income for the year so they are not taxable. Also, it will not affect federal means-tested benefits such as Old age security, Guaranteed income supplement or Employment benefits. TFSA withdrawals will not trigger Old age security clawbacks that usually happen when retirement income is beyond $65,000 a year. Seniors can also profit from TFSA by using it as a tax-shelter for non-registered savings.

Everyone with disposable income and/or non-registered savings should have a TFSA. This includes high income earners, low income earners, new hires and seniors. If you have already maxed out your RRSP contributions the TFSA is a new tax-efficient savings vehicle.

Unlike an RRSP or RESP, a Tax Free Savings Account is designed to help you save for any financial goal at any point in the future. Withdrawals will be tax-free and possible at any time. You do not have to contribute the maximum of $5,000 every year, as the unused contribution room can be carried forward to future years. The only drawback is that contributions are not tax deductible and capital losses cannot be claimed.

Contributor: Lionel Dionne, Research Officer