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Tax-Free Savings Accounts (TFSAs)

Canadians now have a new way to save with a Tax-Free Savings Account — a flexible, registered account that allows Canadians to earn tax-free investment income.

The TFSA was introduced in the 2008 federal budget as an incentive for Canadians to save. It is the first account of its kind in Canada, and the government is calling it the single most important personal savings vehicle since the introduction of the Registered Retirement Savings Plan in 1957.

What is a TFSA?

A TFSA is an account in which contributions are made with after-tax dollars and withdrawals are tax-free. This means that investments can grow in the account and be withdrawn at any time without being taxed.

Who is eligible to contribute to a TFSA?

Canadian residents who are 18 years of age or older.

How does it work?

• You can save up to $5,000 every year in a TFSA. The $5,000 annual contribution limit will be indexed to the Consumer Price Index and rounded to the nearest $500. For example, with a 2% rate of inflation, the first increase to $5,500 would occur in 2012.
• TFSAs can hold the same investments as registered accounts, such as mutual funds, segregated funds, stocks, bonds, and GICs.
• Any amount withdrawn from the account is automatically added back to your contribution room for the following year.
• Unused contribution room can be carried forward indefinitely to future years.

What are the differences between TFSAs and RRSPs?

• An RRSP is primarily for your retirement savings, while a TSFA is for other investments and savings.
• Contributions to an RRSP are tax deductible and reduce your taxable income, while contributions to a TFSA are not deductible.
• Withdrawals from an RRSP are added to your income and taxed at your current rate, while TFSA withdrawals are tax-free.
• You must convert your RRSP to a RRIF by age 71 and withdrawals after that time are mandated according to a schedule based on your age. There is no similar requirement
  for TFSAs.
• For RRSPs, once a contribution is made, that contribution room is “used up.” With TFSAs, the amount of a withdrawal is automatically added back to the contribution room in the following year.

What are the other benefits of a TFSA?

• Income earned in a TFSA and withdrawals do not affect your eligibility for income tested benefits, such as Old Age Security, Guaranteed Income Supplement and the Canada Child Tax Credit.
• You can provide the funds for your spouse to contribute to his or her account and the assets in your account are transferred to your spouse upon death without tax implications.
• Those who have maximized their RRSP contributions, or those with employer pension plans who may not be allowed to contribute to an RRSP because of a large pension adjustment amount, can supplement their savings on a tax-free basis.

A TFSA versus an unregistered account

Capital gains and other investment income earned in a TFSA are not taxed.

So, if you contributed $200 a month for 20 years to a TFSA instead of a non-registered account, you would enjoy a total tax savings of $11,045.*

*Assumes a $200 monthly contribution for 20 years, a 5.5% rate of return and an average tax rate of 21%. Source: Government of Canada, 2008 Budget.

The TFSA can be a valuable savings tool, with enough flexibility to meet many different needs. Call your Macquarie Private Wealth Investment Advisor to find out how you can incorporate a TFSA into your financial plan.

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