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New - Open a TFSA in Jan 2009 and save your money!
The Tax Free Savings Account (TFSA)

Government of Canada Resources

TFSA Calculator   Information Guide  Budget 2008 Documents

v      The Federal Government announced the new Tax-Free Savings Account (TFSA) in the Feb. 26, 2008 Budget

v      Starting January 2009, the new Tax Free Savings Account (TFSA) gives you another great way to grow your savings.

v      Canadian residents age 18* and older can contribute up to a maximum of $5,000 per year (for 2009)

v      The $5,000 annual contribution limit will be indexed to inflation in $500 increments.

v      Unused contributions from one year can be carried forward to the next year.

v      Contributions are not tax deductible. (major difference from RRSP contributions which are tax deductible).

v      Interest, Investment earnings and Capital gains will accumulate tax-free.

v      Withdrawals from the TFSA will not be subject to tax.

v      Withdrawals create contribution room for future savings.

v      TFSA savings can be used for any thing -- to purchase a new car, renovate a house or start a small business

v      Income and withdrawals from a TFSA will not affect eligibility for federal income-tested benefits and credits like:

  • age amount tax credit

  • no clawback of Old Age Security

  • or reduction of the age exemption

  • guaranteed Income Supplement

v      Contributions to a spouse's  or common-law partner's TFSA will be allowed, subject to the contribution room of the spouse

v      TFSA assets will be transferable to the spouse's TFSA upon death.

Frequently Asked Questions

  1. What is the Tax-Free Savings Account (TFSA)?
  2. According to the 2008 budget, who would be eligible to open a TFSA?
  3. When can I open, start saving and investing in a TFSA?
  4. How much can I contribute to the TFSA per year?
  5. Who is a TFSA best suited for?
  6. Would I be able to use any unused contribution room from one year in a future year?
  7. What happens if I contribute more than my contribution room?
  8. Can I open more that one TFSA?  
  9. Would there be any restrictions on withdrawals?
  10. Would contributions and withdrawals have any impact on my taxes and income-tested benefits?
  11. What kind of investments could I hold in my TFSA?
  12. Who is authorized to offer TSFAs?
  13. Is interest on money borrowed to invest in my TFSA tax-deductible?
  14. Could I use my TFSA assets as security for a loan?
  15. Can I contribute to my spouse's or common law partner's TFSA?
  16. Would income earned in a TFSA funded with money given to my spouse be attributed back to me?
  17. Will I be taxed withdrawals or earnings in my spouse's TFSA funded with money given by me?
  18. Can I open a joint TFSA with my spouse or someone else?  
  19. What happens if the account holder passes away?
  20. What would happen if there was a breakdown of a marriage or a common-law partnership?
  21. Could I still contribute to a TFSA if I become a non-resident of Canada ?
  22. How would I know what my TFSA contribution room is for a given tax year?
  23. Where can I get more information on the proposed TFSA?
  24. Is it  more advantageous for Canadians to contribute to the new TFSA or to their RRSPs?
  25. What are the other considerations when contributing to a TFSA?
  26. How is a TFSA different from an RRSP?

1. What is the Tax-Free Savings Account (TFSA)?  

The TFSA is a registered savings account which allows Canadian residents to earn interest, dividend, other types of investment income and capital gains tax-free.

Beginning in January 2009, individuals residing in Canada , who are 18 years of age and older, can contribute up to $5,000 per year to a TFSA where the holdings grow and earn income tax-free. Contributions to a TFSA are not deductible for income tax purposes.

The TFSA dollar limit is $5,000 in 2009, and will be indexed to inflation and rounded to the nearest $500 in later years. Unused TFSA contribution room can be carried forward to later years.

 The Tax-Free Savings Account is extremely flexible and you can withdraw funds at any time.  Withdrawals create proportionate contribution room in future years.

2. According to the 2008 budget, who would be eligible to open a TFSA?

Any individual (other than a trust) who is resident in Canada and 18 years of age or older would be eligible to open a TFSA.

You can open an account at most financial institutions which are currently eligible to issue a Registered Retirement Savings Plan such as Canadian Trust companies, Life insurance companies, Banks, and Credit unions.

You would have to provide the issuer with your social insurance number when the account is open.

3. When can I open a TFSA?

The 2008 budget proposal allows you to open a TFSA starting in 2009. Some banks and financial institutions have already started offering pre-registration type accounts – that will roll into the TFSA Account as soon as the TFSA takes effect.

4. How much can I contribute to the TFSA per year?

There is an annual contribution room each year. The current maximum for 2009 is  $5000.

For future years, your contribution room would be made up of three amounts:

  1. The maximum contribution amount allocated for that year. (for 2009, the contribution room is $5,000; but this annual amount is expected to be indexed to inflation and rounded to the nearest $500 on a yearly basis).
  2. Plus, any withdrawals made in the previous year, will be added to the contribution room for the current year.
  3. Plus any unused contribution room from the previous year will be added to the contribution room for the current year.

For example (at the current maximum of $5000 per year and assuming no indexing):

  • In 2009 you are allowed to contribute up to $5,000. If you only contribute $3,000, an amount of $2,000 would be carried forward to 2010.
  • Your contribution room for 2010 would then be $5,000 plus $2,000, or $7,000.
  • Further, if you withdraw 1000 in 2009,  (your balance in teh Account is now 2000); and your contribution room for 2010 would then be:

§          $5,000 plus $2,000, or $7,000
§        
Plus another $1000 which you withdrew in 2009
§        
So you can contribute a total of $8000 in 2010 ($5000+$2000+$1000)

So, total maximum holding in the Account for 2 years would be $10000 (8000 available for contribution plus you have $2000 balance)*

In 2010, if you do not contribute but decide to withdraw $,4000, your contribution room for 2011 would be $5,000, plus $8,000 (carried forward from 2010), plus the $4,000 withdrawn in 2010.  So the max total amount in your account in 2011 can be: $14,000. ($5000 + $8000 + $4000).

The Total allowable amount in your Account will always be the Max amount per year * No of years. because withdrawals and amounts not contributed for a particular year can always be carried forward.)

* In reality however, the max would be more, since the max permissible amount each year will increase based on indexing.

5. Who is a TFSA best suited for?  

A TFSA may be well suited for:

  • Individuals who want to access to funds on a tax-free basis before retirement.
  • Individuals who have maximized their RRSP contributions.
  • Seniors who have savings and are concerned about their investment earnings impacting federal income-tested benefits or credits (i.e. such as Old Age Security benefits, the Guaranteed Income Supplement, or the federal age credit.

6. Would I be able to use any unused contribution room from one year in a future year?

Yes, the 2008 budget proposes no limit on the number of years unused contribution room could be carried forward. 

7.What happens if I contribute more than my contribution room?

The 2008 budget proposes that excess contributions would be subject to tax of one per cent per month, for each month that the excess remains in the plan.

8.Can I open more that one TFSA?  

Yes. You can open more than one TFSA but, the total contributions to all your TFSA accounts cannot be more than your maximum contribution room for that year (including any carry forward amounts from previous years).

For example, in the Start up year – 2009 -- your maximum contribution limit will be $5,000, therefore you can open one TFSA to which you contribute $3,000 and another TFSA to which you contribute $2,000, so your total combined TFSA contributions equals the maximum of $5,000.

9.Would there be any restrictions on withdrawals?

No, there is no restriction on how withdrawals can be made or used. Withdrawals may be made for personal reasons, investment, or any other purpose.  You are free to  withdraw any amount in the account, at any time, for any reason. 

10.Would contributions and withdrawals have any impact on my taxes and income-tested benefits?

No, contributions to a TFSA would not be deductible in computing income for tax purposes.

Withdrawals of contributions and earnings from the account are tax-free and these amounts will not be included when computing income for tax purposes; or when calculating credits based on income (like the Canada Child Tax Benefit, the Working Income Tax Benefit, the goods and services tax credit, and the age credit);.

Furthermore, these amounts would not reduce other benefits that are based on the individual's income level, such as Old Age Security benefits, the Guaranteed Income Supplement, or Employment Insurance benefits.

11.What kind of investments could I hold in my TFSA?

In general, a TFSA can hold the same investments as a RRSP - Registered Retirement Savings Plan. This would include Cash, Mutual funds, publicly traded securities, GICs, Bonds, and certain shares of small business corporations.

Generally speaking, a TFSA is administered in the same way as an RRSP: an account has to be opened with an authorized issuer, you must provide your social insurance number, and loan expenses and interest are non-deductible, etc.

As with RRSPs, the money must be invested in qualified investments and there will be penalties for contributions exceeding the annual limit.

12. Who is authorized to offer TSFAs?

Financial institutions currently eligible to issue RRSPs, like Canadian Trust companies, Life insurers, Banks and Credit Unions will be allowed to issue TFSAs.

To provide the CRA with the means to determine contribution room and monitor compliance, TFSA issuers will be required to file annual information returns, which are expected to include, for example, the value of an account’s assets at the beginning and end of the year and the amount of contributions, withdrawals and transfers made during that year.

13. Is interest on money borrowed to invest in my TFSA tax-deductible?

No, interest on money borrowed to invest in a TFSA would not be deductible for tax purposes. 

14. Could I use my TFSA assets as security for a loan?

Yes, you could use the TFSA assets as security for a loan.   You can use your TFSA assets as collateral for a loan.

15. Can I contribute to my spouse's or common law partner's TFSA?  

Only the TFSA account holder can contribute to their own TFSA account. However, you can give money to your spouse or common-law partner to contribute that money to his/her own TFSA; without affecting your own annual contribution limits.

16. Would income earned in a TFSA funded with money given to my spouse be attributed back to me?

No, attribution rules do not apply to income earned in a TFSA where you provide funds to your spouse or common-law partner. Attribution rules will not apply to income earned on those contributions.

17. Will I be taxed withdrawals or earnings in my spouse's TFSA funded with money given by me?  

Withdrawals and income earned in the TFSA are not taxable to either you or your spouse/common-law partner regardless of whose money was used to make the contribution.

18. Can I open a joint TFSA with my spouse or someone else?  

No. Since this is a Registered Account , similar to other registered accounts like RRSPs, Joint TFSAs are not allowed.

19. What happens if the account holder passes away?

An individual’s TFSA will lose its tax-exempt status upon the individual’s death, with investment income and gains that accrue in the account after the individual’s death considered taxable, while those that accrued before death remaining exempt. 

However, an individual can name his or her spouse or common-law partner as successor account holder; in which case the account will keep its tax-exempt status. Alternatively, the assets of the deceased's TFSA could be transferred to the TFSA of the surviving spouse or common-law partner, regardless of whether the survivor has available contribution room, and without reducing the survivor’s existing room.

20. What would happen if there was a breakdown of a marriage or a common-law partnership?

On the breakdown of a marriage or common-law partnership, an amount can also be directly transferred to the ex-spouse’s TFSA. The amount of the transfer would not affect either person's contribution room. That is, the transfer will not re-instate contribution room for the transferor, and will not count against the contribution room of the transferee. 

21. Could I still contribute to a TFSA if I become a non-resident of Canada ?

If you become a non-resident, you would be allowed to maintain your TFSA and continue to benefit from the exemption from tax on investment income and withdrawals. You would not be taxed on any earnings in the account or on withdrawals; however, you would not be allowed to contribute, and no contribution room would accrue for any year throughout which you are a non-resident.

22. How would I know what my TFSA contribution room is for a given tax year?

The CRA will determine TFSA contribution room for each eligible individual who files an annual T1 individual income tax return. Your financial institution which holds the TFSA will report your contributions and withdrawals, so that CRA will be able to keep track of how much contribution room you have used and how much you have left.

Individuals who have not filed returns for prior years (because for example, there was no tax payable) would be permitted to establish their entitlement to contribution room by filing a return for those years or by other means acceptable to the CRA.

23. Where can I get more information on the proposed TFSA?

The CRA is committed to providing taxpayers with up-to-date information. Please check this Web site often —  we will attempt to post all new forms, policies, and guidelines here as they become available.

24. Is it  more advantageous for Canadians to contribute to the new TFSA or to their RRSPs?

There is no straight answer to this since each has its own merits and de-merits.  Consult your financial advisor to check what best sits your current situation.  It could be one or teh other or a cmobination of baoth.  However, here is a general thumb rule.  If you’re in a high tax bracket now, and expect to be in a low bracket later, then you might choose to contribute to an RRSP.   But if you’re in a low tax bracket now and expect to be in a higher tax bracket later, you will want a TFSA. 
(See the comparison table at Q. 26)

25. What are the other considerations when contributing to a TFSA? 

Remember that an RRSP gives you an immediate tax break because it can be deducted from income.  On the other hand, contributing to a TFSA yields no immediate tax break, but the tax savings benefit arises when you withdraw money.

Since amounts accumulated in a TFSA are not taxable, it may be advantageous to invest in interest-generating investments taxed at the highest rate ; so you can save on those taxes; but each investment also needs to be examined for its overall benefits and suitability to your situation.

Look at the interest rate you will receive on your TFSA account; if you are planning to have Cash deposits.  Interest rates may vary from one financial institution to another.

 Lastly, don’t forget the TFSA implementation and management fees. The materiality of these fees will be lower if you take a long-term rather than a short-term investment horizon.

26. How is a TFSA different from an RRSP?

TFSA RRSP
With a TFSA, you don't need to have any income to accumulate the $5,000 per year contribution room With an RRSP, you must have income in order to accumulate contribution room
Withdrawals from a TFSA are tax-free. Withdrawals from an RRSP are taxed in the year of withdrawal (with the exception of the Home Buyer's Plan (HBP) and Lifelong Learning Plan (LLP) which are not taxed provided they are repaid on schedule).
Any amount withdrawn is then added to your contribution room in the following year, so that you could later recontribute the amount that you withdrew. Any amount withdrawn can not be added to your contribution room in the following year.
Contributions to a TFSA are not tax-deductible on your income tax return. Contributions to your RRSP are tax-deductible on your income tax return
There is no requirement to convert the TFSA to an income payment option (e.g. a RRIFor an annuity) at any age An RRSP must be fully withdrawn or be transferred to a RRIF or annuity by the end of the year you turn 71.
Contributions to a TFSA are not tax-deductible on your income tax return. Contributions to your RRSP are tax-deductible on your income tax return

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