Tax-Free Savings Accounts

The Tax-Free Savings Account (TFSA), introduced in the February 2008 Federal Budget, allows Canadians to save money in eligible investment vehicles and allows those savings to grow tax-free throughout their lifetimes.  TFSA savings can be used for any future purposes without restrictions.

Canadians from all income levels and all walks of life can benefit from TFSAs.

How the TFSA Works

·  Starting in 2009, every Canadian resident aged 18 and older who has a valid social insurance number  can save up to $5,000 every year in a TFSA.  The $5,000 annual contribution limit will be indexed to inflation in $500 increments.

·  Contributions to a TFSA are not deductible for income tax purposes but investment income, including capital gains, earned in a TFSA will not be taxed, even when withdrawn.

·  Unused TFSA contribution room can be carried forward to future years.

·  You can withdraw funds from the TFSA at any time for any purpose.

·  Any amount withdrawn can be put back in the TFSA in a future year date without reducing your contribution room.

·  Neither income earned in a TFSA nor withdrawals will affect your eligibility for federal income-tested benefits and credits.

·  Contributions to a spouse’s TFSA are allowed and TFSA assets can be transferred to a surviving spouse upon death of an annuitant.

·  You can have named beneficiary(ies) on your TFSA which can be very useful in estate planning.

How Is a TFSA Different From an RRSP?

An RRSP is primarily intended for retirement. The TFSA is like an RRSP for everything else in your life.  Where an RRSP offers tax-deferred savings on pre-tax contributions a TFSA offers tax-free savings on after-tax contributions.

Both plans offer tax advantages, but they have key differences.

·  Contributions to an RRSP are deductible and reduce your income for tax purposes.  In contrast, contributions to your TFSA savings are not tax-deductible.

·  Withdrawals from an RRSP are added to your income and taxed at current rates.  Your TFSA withdrawals and the growth within your account are not subject to tax - they are tax-free.

A Flexible Account for a Lifetime of Savings

Not everyone is able to save each and every year.  Those who cannot contribute $5,000 in a given year will be able to carry forward their unused contribution room to future years.

In addition, you may want to use your savings to buy a new car or a cottage, to start a small business, take a vacation or help your children buy a home.  If you do, the full amount of withdrawals can be put back into your TFSA in the future.

Benefits for Young and Old Alike

Young Canadians will benefit by using the TFSA to start saving early for future needs and goals.  The TFSA also provides seniors with a tax-free savings vehicle to meet ongoing savings needs, something they have only limited access to once they reach age 71 and are required to begin drawing down their registered retirement savings.

No Impact on Income-Tested Benefits

Neither income earned in a TFSA nor withdrawals will affect your eligibility for federal income-tested benefits and credits, such as the Guaranteed Income Supplement and the Canada Child Tax Benefit.

What Kind of Investments Can I Hold In a TFSA?

Similar to an RRSP, you can hold cash, GICs, mutual funds, publically traded securities and various other investments within a TFSA.  As these savings plans are brand new, there are various schools of thought as to what the most appropriate types of investments are for them and what the best use is for a TFSA.  Some would argue that they are ideal for a short–term savings type account because interest (which is the least tax-efficient type of investment income) is earned tax free in a TFSA.  Others would say that by allocating your most aggressive long term investments to your TFSA, you’ll have the potential for the greatest tax savings as your investments grow over the long term.  As with most matters in financial planning, what’s “right” for one person may not be the best for another person.  We would be happy to review your situation with you to help determine what’s best for you.

How Do I Set a TFSA Up?

There’s a simple application form to be completed and if you are transferring investments from a non-registered account into the TFSA, there will be a form for that.   You can also make monthly contributions to your TFSA and take advantage of "dollar-cost-averaging".  We believe that the Tax Free Savings Account will become an important part of everyone’s financial plan.   If you have questions about tax free savings accounts that we haven’t adequately answered here,  please call our office at 604-737-8886.