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Tax-Free Savings Accounts

Starting in January 2009, every Canadian over the age of 18, with a social insurance number will be able to contribute to a Tax-free savings account. Although contributions will not be tax deductible, any earnings (ie. interest, dividends, capital gains) and withdrawals will be fully TAX-FREE. There will be no limit on how many TFSAs you set up as long as you are within the maximum TFSA contribution room limits. TFSA accounts can be transferred between one institution to another. Money borrowed to invest into a TFSA will not be tax-deductible.

How much can I contribute?

Years 2009, 2010, 2011, 2012 was $5,000. Year 2013 and 2014 was $5,500. Year 2015 was $10,000. Year 2016, 2017 and year 2018 is $5,500 and year 2019 & beyond is $6,000. TFSA contribution room will be cumulative and will be carried forward indefinitely to future years if funds are not available to be deposited in the current year. The best part of this plan is unlike the RRSP system, any amounts withdrawn from your TFSA in a particular year, will be automatically added to your TFSA contribution room for the following year. Essentially your contribution room is never lost. There is NO maximum age limit to invest into a TFSA and more than 1 TFSA can be held by an individual as long as you are within the maximum TFSA contribution room.

As with RRSPs, any excess contributions beyond the TFSA limits will be taxed at 1 percent per month. Contributions ‘in kind’ will be considered a deemed disposition, with a capital gain being reportable and any capital loss denied, just like with ‘in kind’ RRSP contributions.

How will TFSAs be Taxed & What happens upon withdrawal of funds?

There will be NO TAX paid on gains made within a TSFA. All interest, dividends, capital gains and withdrawals will be tax exempt. No tax will be paid while earnings are being made within the TFSA or at withdrawal. Upon withdrawal, you will have to wait until the following year to re-contribute to the TFSA.

TFSA Effect on Income Tested Government Benefits

The government announced that withdrawals made from a TFSA are not considered income and therefore will have no impact on government benefits or credits, such as GIS, OAS, EI, the Canada Child Tax Benefit or the Goods and Services Tax.

What Can I Invest In?

A TFSA will be allowed to invest in basically the same broad list of qualified investments permitted for RRSPs. These will include GICs, term deposits, bonds, mutual funds and stocks to name a few.

What Happens Upon Death?

Individuals will be able to name a surviving spouse or partner as a ‘successor account holder’, in which case the TFSA will continue to be tax exempt. The assets of the deceased individual’s TFSA can be transferred to the surviving spouse without affecting the receiving spouse’s TFSA contribution room.

If there is no surviving spouse/partner, then the fair market value of the TFSA on the date of death will be received by the estate on a tax-free basis, but any income or gains accruing after the date of death will be taxable.

What Happens if I Become a Non-Resident?

If you become a non-resident and live outside Canada, you can still hold your TFSA and continue to benefit from the tax exemption on investment income and withdrawals. However you will not be able to contribute to your TFSA and no TFSA contribution room will continue to accrue for you.