The Tax Free Savings Account also known as the “TFSA” for short is a new type of registered savings account available to Canadians starting this year in 2009.
Features of a TFSA
- All investment income (dividends / interest) and capital gains are allowed to grow TAX FREE within the account
- All funds may be withdrawn from the account TAX FREE including both your contributions and investment returns
- Each year you are allowed to contribute a specific amount to your TFSA. In the 2009 the maximum contribution is $5000 which will rise with inflation in increments of $500.
- Contribution room is carried forward so if you miss a year, don’t sweat it, you can always make it up in future years
- If you withdraw money from a TFSA you can re-contribute the full amount in future years
- Neither income earned within a TFSA nor withdrawals from it affect eligibility for federal income-tested benefits and credits, such as Old Age Security, the Guaranteed Income Supplement, and the Canada Child Tax Benefit.
- You can provide funds to your spouse or common-law partner to invest in their own TFSA without penalty
- TFSA assets can be generally transferred to your spouse or common law partner upon death
- Contributions made to a TFSA account are NOT tax deductible.
- If you contribute more than the annual limit you will be taxed 1% per month on the excess contributions
What Investments Are Eligible For A TFSA?
The following are primary assets you can hold within a TFSA.
- Cash
- Guaranteed investment certificates (GICs)
- Government and corporate bonds
- Mutual funds
- Publicly traded securities/stocks
Difference Between A TFSA and an RRSP
An RRSP is a savings vehicle used mostly for retirement purposes, while a TFSA is used for everyday savings. Both are similar in that they offer tax advantages, but they have distinct differences.
RRSP
- Contributions to an RRSP are tax deductible against current income
- Withdrawals from an RRSP are added to your income and taxed at your marginal tax rate
TFSA
- Contributions to a TFSA are not tax deductible against current income
- Withdrawals from a TFSA are tax free including an capital gains and investment income (dividends + interest)
TSFA Calculator
Give the TSFA Calculator a try to figure out much you can save with a TFSA over time.
