What is a TFSA?
In introducing the TFSA concept in the 2008 Federal Budget, the Federal Government proposed a new way for Canadians to save money. The TFSA structure allows taxpayers to save or invest their money in eligible TFSAs without paying any income tax on the investment income or capital gains earned. Taxpayers can also withdraw from their TFSAs on a tax-free basis.
When can you start a TFSA?
Effective January 1, 2009, taxpayers can contribute up to $5,000 per year, though this limit may increase in the future in response to inflation. The $5,000 annual limit is in addition to the taxpayer's RRSP Contribution limit. Any unused contribution room may be carried forward indefinitely.
Where can you set up a TFSA?
TFSAs may be set up by any financial institution, including investment brokerage firms, insurance companies, mutual fund dealers, trust companies and chartered banks.
Eligible investments include most investments that can currently be held in an RRSP. These may include certain savings accounts, GICs, mutual funds, stocks and bonds.
Who is eligible for a TFSA?
In order to be eligible to set up a TFSA, a taxpayer must:
- be at least 18 years old;
- hold a valid Social Insurance Number; and
- be a Canadian resident.
Why should you set up a TFSA?
There are many benefits to setting up a TFSA. Following are some of those benefits:
- Your investments will grow faster because both investment income and capital gains earned within TFSAs are tax-free.
- TFSAs are more flexible than RRSPs and RESPs. They can help you save for any financial goal at any point in the future, be it a home, an automobile or a vacation.
- You can withdraw any amount of funds at any time without paying any income tax.
- The amount withdrawn from a TFSA can be put back into a TFSA at any time without reducing your annual contribution limit.
- Having a TFSA will not affect your eligibility for federal income-tested benefits, such as the Canada Child Tax Benefit and the Guaranteed Income Supplement.
- Your TFSA assets are transferable to your spouse or common law partner upon your death.
- TSFAs encourage you to start saving early to meet your future demands without worrying about income taxes on your earnings and withdrawals.
It should be noted that TFSA contributions are not tax deductible. Despite this disadvantage, however, TFSAs are suitable for Canadian taxpayers of all income levels and ages. Contact your Collins Barrow advisor for more information on TFSAs in the context of your own financial circumstances.
Samuel Young is a partner in the Edmonton office of Collins Barrow.
Related content
