Tax Free Savings Accounts
• November 2008•
The Tax-Free Savings Account (TFSA) is a new registered account that allows Canadians to set money aside in eligible savings vehicles and earn investment income tax-free inside the account throughout their lifetimes.
How is the TFSA different from an RRSP?
Though RRSP’s and TFSA’s are both savings vehicles that offer tax advantages, they are different in that:
- RRSP contributions are deductible, and defer tax until the funds are withdrawn.
- TFSA contributions are not deductible. TFSA growth is tax-free, as are any withdrawals.
Who is eligible?
To open a TFSA, you must be a Canadian resident 18 years of age or older, with a social insurance number. There is no maximum age limit and no minimum or maximum income levels to take advantage of a TFSA.
How much can I contribute to the TFSA per year?
You could contribute an amount up to your contribution room for the year, which is made up of 3 amounts:
- Each year, you would be allocated and allowed to contribute at least $5,000 (annual amount will be indexed to inflation and rounded to the nearest $500 on a yearly basis).
- Any withdrawals made in the previous year would be added to the contribution room for the year.
- Any unused contribution room from the previous year would be added to the contribution room for the year.
Are there any restrictions on withdrawals?
Any amount can be withdrawn from the account at any time for any reason. The amount that you withdraw can be put back in the TFSA the following calendar year, without reducing your contribution room.
What if I don’t deposit my full contribution amount for the year?
You can make use of any unused contribution room in a future year. There is no limit on the number of years that it can be carried forward.
What if I deposit more than my contribution room?
Excess contributions will be subject to tax of 1% per month, for each month that the excess remains in the plan.
Can I contribute to my spouse’s TFSA?
Yes, Canadians can contribute to their spouse’s TFSA, depending on the spouse’s available contribution room. Any investment income or capital gains earned in the account will remain tax-free.
What kind of investments could I hold in my TFSA?
A TFSA would generally be permitted to hold the same investments as an RRSP. This includes mutual funds, publicly traded securities, GIC’s, bonds, and certain shares of small business corporations.
Is interest on money borrowed to invest in my TFSA tax-deductible?
No, this interest will not be tax-deductible.
Will contributions and withdrawals have any impact on my eligibility for federal income-tested benefits, such as Old Age Security or the Guaranteed Income Supplement?
Neither income earned in your TFSA, nor withdrawals, will affect your eligibility for federal income-tested benefits.
What happens if the account holder passes away?
The earnings that accrue in the account after the account holder's death will be taxable, while those that accrued before death would remain exempt. The assets of the deceased's TFSA could be transferred to the TFSA of the surviving spouse without any impact on the survivor's existing contribution room.
To open a Tax-Free Savings Account, please contact your Rogers Group Financial advisor.
For more information, please visit:
Government of Canada handout - Tax-Free Savings Account (TFSA)
Government of Canada website - Tax-Free Savings Accounts
Tax Free Savings Accounts (TFSAs)… A Closer Look