Tax Free Savings Account

The Tax-Free Savings Account (TFSA) is a flexible, registered general-purpose savings vehicle that allows Canadians to earn tax-free investment income to more easily meet lifetime savings needs. The TFSA complements existing registered savings plans like the Registered Retirement Savings Plans (RRSP) and the Registered Education Savings Plans (RESP).

How the Tax-Free Savings Account Works

• A limit of one TFSA per person. Similar to RRSPs, this account is reported to the Canada Revenue Agency.
• Contributions to a TFSA will not be deductible for income tax purposes but investment income, including capital gains, earned in a TFSA will not be taxed, even when withdrawn.
• Unused TFSA contribution room can be carried forward to future years.
• You can withdraw funds from the TFSA at any time for any purpose.
• The amount withdrawn can be put back in the TFSA at a later date (not within the same calendar year) without reducing your contribution room.
• Neither income earned in a TFSA nor withdrawals will affect your eligibility for federal income-tested benefits and credits.
• Contributions to a spouse’s TFSA will be allowed and TFSA assets can be transferred to a spouse upon death.

How Is a TFSA Different From a Registered Retirement Savings Plan?

• An RRSP is primarily intended for retirement. The TFSA is like an RRSP for everything else in your life .
• Both plans offer tax advantages, but they have key differences.
• Contributions to an RRSP are deductible and reduce your income for tax purposes. In contrast, your TFSA savings will not be deductible.
• Withdrawals from an RRSP are added to your income and taxed at current rates. Your TFSA withdrawals and growth within your account will not—they will be tax-free.
• Those who cannot contribute $5,000 in a given year will be able to carry forward their unused contribution room to future years.
• In addition, Canadians may want to use their savings—to buy a new car or a cottage, or start a small business—and the full amount of withdrawals can be put back into the TFSA in the future.
• Couples often save and plan together, so Canadians can contribute to their spouse’s or common-law partner’s TFSA, depending on the spouse’s or partner’s available room.

The Tax Free Savings Account offers a great opportunity for people to save money from taxes, but please remember that the only money that is safe from taxation with the TFSA is the interest earned. With that in mind, this can be a very useful tool for you to use as your interest grows tax free over time.
Jerry