Tax Free Savings Accounts (TFSA)

These types of investment accounts were created effective the 2009 tax year.  Financial advisors, actuaries, accountants and others had been lobbying the federal government for years to create additional incentives for Canadians to save.  This new type of plan was long overdue and has been well received.

Each Canadian over the age of 18 years old, with a SIN number, and who files a tax return for the year is granted $5,000 of TFSA room each year.  Since 2009 anyone that has not contributed to a plan has carried forward their contribution room to be used in the future.  By 2018, most Canadians will have accrued $50,000 of eligible contribution room.

Contributions to a TFSA are made in after tax dollars (unlike RRSP's).  Any income earned in the plan (capital gains, dividends, interest) is not taxed.  Similarly, money withdrawn from a plan is not taxed; no T slip of any kind is generated therefore no income shows up on a tax return.  This has important implications which will be discussed later.

Each year eligible tax payers TFSA contribution room is $5,000 plus whatever was either not contributed in past years, or whatever was withdrawn in the prior year.

As an example, if $5,000 were put in a TFSA and over 2 years grew to $10,000, the full amount can be withdrawn from the account tax free.  In the following year the tax payer can now contribute $15,000 to their TFSA ($5,000 of new room in the current year + the amount withdrawn in prior years).

Whether your savings goals are short term (saving for a car or a vacation) or long term (additional retirement savings or for a vacation property) these versatile plans are right for you.

With traditional retirement savings plans such as RRSP's or pensions, all of the income that is paid to you from these plans is taxable income, and is reported on your tax return.  This has the effect of reducing certain income tested government retirement benefits you may be eligible for.

With TFSA's, no tax receipt is generated for income earned or amounts withdrawn, so they have no effect whatsoever on the income tested government retirement benefits.  For people of modest means they may be a more effective method of saving than RRSP's.

To find out more information about Tax Free Savings Accounts, and to determine if they are a suitable vehicle for you to save money, you should speak to your financial advisor.