What is a Tax Free Savings Account?
The Tax Free Savings Account (TFSA) is a new savings plan registered with the Canada Revenue Agency available to all Canadians who are at least 18 years of age and have a Social Insurance Number.  Beginning January 2, 2009, the TFSA will offer a new way for Canadians to save their money in a tax sheltered plan.  The TFSA allows you to save money that you need for retirement, major purchases, education, vacations or emergencies without restrictions on when you have access to your funds.

What are the Benefits of a TFSA?

Tax-Sheltered
Much like an RRSP, the TFSA is an attractive savings tool because of its tax advantages.  The structure of the TFSA however is quite different than an RRSP.  Similar to the RRSP, the income and gains that are earned within your TFSA account are not taxed.  One major difference is that the money that you invest into your TFSA is after tax.  That means that you won’t receive a deduction on your taxes for the contributions that you make, but when you withdraw money from your TFSA it won’t be taxed as income either.

Freedom to Withdraw Funds at Anytime
Another major advantage of the TFSA is that there are no restrictions on when you can use the funds that you hold in your TFSA account.  Your funds can be withdrawn at any time, tax free.  In addition, you don’t lose contribution room when you make a withdrawal.  You will be able to re-contribute any amount that you withdraw in the following year (in addition to your regular contribution room of $5,000).  This flexibility also makes the TFSA ideal for immediate needs such as emergency funds and for bridging periods of income volatility – giving you access to your tax sheltered investment savings without the negative taxation consequences of early withdrawals from an RRSP. 

Contribution Carry-Over
In 2009 each Canadian 18 years or older will have $5,000 in contribution room for their TFSA.  This amount will increase with inflation by $500 increments subject to government guidelines.   Any portion of your contribution room that isn’t used in one year carries over to your contribution for the next year.  If, for example, you were to contribute $3,000 in 2009, you would have $7000 available to contribute in 2010.

Spousal Contributions
The government does not allow for joint TFSA accounts.  However if you would like to make a contribution to your spouse’s TFSA, you can give money to your spouse to do so without being subject to income attribution rules.  Any money you give to your spouse to invest will be owned by your spouse in his or her account.

Keep Saving Beyond 71
Unlike the RRSP, a TFSA account does not have an age limit for making contributions or to force withdrawals.  You are free to contribute to or save within your TFSA for as long as you please.  Since the withdrawals will not be considered taxable income, you can save and withdraw from your TFSA without affecting your income-tested benefits from the federal government including Old Age Security (OAS), Guaranteed Income Supplement (GIS) or the GST credit.

No Tax Upon Transfer
Upon death of the TFSA account holder, the assets in the TFSA account will not be subject to taxation upon transfer to a surviving spouse, child, or anyone else.  Furthermore, the recipient’s TFSA contribution room will not be affected by the transfer. 

Companion to the RRSP Providing Additional Contribution Room
For those who find that their RRSP contributions are restricted by the current $20,000 per year RRSP contribution limit, the TFSA can be viewed as a welcome companion to the RRSP facilitating an additional $5,000 of contribution room annually for tax sheltered growth of their investment savings.  Furthermore, for the nearly 40% of paid workers in Canada who are covered by a registered pension plan, the TFSA will facilitate additional tax sheltered investment savings contribution room that was otherwise limited by the pension adjustment for their RRSP contributions.

TFSA Investment Options
Much like an RRSP, there are a wide variety of investment options available to you.  These include GICs, Mutual Funds, and other securities.  The choice of suitable investments for your TFSA will be dependent on your personal and financial goals, needs, investment objectives, time horizon, risk tolerance and other factors.  Your Canadian First Financial Centres Advisor can work with you to identify and understand these considerations in order to recommend suitable investment options to support your plan and objectives.

Where and When do I Start?
TFSA accounts can be activated started January 2, 2009.  The power to start now and take advantage of every day your money could be working for you is in your hands.  Contact a Canadian First Financial Centres Advisor to learn more and get your TFSA plan started today!

Featured Product: