TFSA
Compound you savings...tax free.
Eligibility
Every resident of Canada who is age 18 or older and files an income tax return is eligible to contribute to a TFSA. There is no maturity date on a TFSA like a registered retirement savings plan (RRSP) and it does not need to be wound-up or converted to a different investment vehicle.
Investment Options
The tpyes of investments that can be hold in a TFSA are generally the same as those permitted for an RRSP.
These investments include:
- Mutual Funds
- Segregated funds
- Publicly traded shares
- Government and corporate bonds
- Guaranteed investment certificates
Some of the types of investments that cannot be held in a TFSA are:
- Share or debt of a company in which you have significant interest
- Futures contracts
- Works of art
- Precious metals
- Real estate
If you hold a non-qualified investment in your TFSA, you would be liable to pay tax equal to 50% pf the value of the non-qualified investment. Any income earned on that investment would also be subject to tax.
You can transfer funds from an existing non-registered account to your TFSA, but be aware the redemption may trigger capital gains and tax. If the transfer gives rise to a capital loss, the loss is denied.
Contributions:
$5,000 per year for life
Starting in January 2009, the annual contribution limit is $5,000, regardless of how much income you earn. This amount will be indexed annually based on increases in the consumer price index in $500 increments. The Canada Revenue Agency (CRA) will notify you of your contribution room for each year. A one percent per month penalty tax applies to over-contributions.
Unused contribution room can be carried forward like and RRSP, so if you can't contribute the maximum amount in any given year you can wait and contribute larger sums in the future when you have more money available. When withdrawals are made, your contribution room is not lost and the amount of the withdrawal is added back to your contribution room in the following year!
Although contributions aren't tax deductible, you don't pay tax when you take the money out, unlike an RRSP, and you don't pay tax on the investment income you earn while your money grows inside a TFSA. Although you cannot contribute directly to your spouse or common law partner's TFSA, you can gift money to your spouse so he or she can contribute to his or her own TFSA without the investment income being subject to the normal attribution rules as long as the investment stays in the TFSA.
Withdraw any time, for any purpose
The money you accumulate in a TFSA can be withdrawn at any time without tax consequences, and without affecting any federal income-tested benefits or tax credits you may be eligible for such as old age security, guaranteed income supplement, the age credit, the goods and services tax (GST) credit or the Canada Child Tax Benefit. There are no time limits for withdrawing and no restrictions on how you spend you money.
Withdrawals increase your contribution room in the year following the withdrawal, allowing you to save again for another purpose. |
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Save, withdraw, and contribute again
This example shows the flexibility of the TFSA. You don't lose contribution room if you don't use it because you can carry it forward, and you can withdraw your savings any time you need to.
| Year 1 |
Annual Contribution Room |
$5,000 |
| |
Contribution |
-$2,000 |
| |
Amount to carry forward |
$3,000 |
| |
|
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| Year 2 |
Annual Contribution Room |
$5,000 |
| |
Carry forward from year 1 |
+$3,000 |
| |
Amount to carry forward |
$8,000 |
| |
Withdrawals $1,000 later in the year |
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| |
|
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| Year 3 |
Annual Contribution Room |
$5,000 |
| |
Carry Forward from year 2 |
+$8,000 |
| |
Withdrawal from year 2 |
+$1,000 |
| |
|
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Available contribution room |
$14,000 |
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Upon Death
To maintain the tax-free status of the TFSA on death, you can name your spouse or common-law partner as the successor account holder. On your death your spouse would become the holder of the ongoing TFSA. Alternatively, subject to meeting certain conditions, he or she could transfer your TFSA assets or the value of your TFSA to his or her own TFSA without affecting his or her contribution room.
If the plan cannot be continued as a TFSA with your spouse as account holder, or transferred to the TFSA of your spouse, the plan is taxed as a non-registered investment after your death.
Upon death, any unused TFSA room you had is lost. |
