Tax-Free Savings Accounts

TFSA savings accounts are available as:

• Guaranteed Investments
• Mutual Funds *
• Segregated Funds **

*Mutual funds offered through Investia Financial Services Inc.

** More information about Segregated Funds.

The tax-free savings account (TFSA) is a new account type. It’s another savings option for clients that was available on Jan. 2, 2009.

Contribution room begins to accumulate Jan. 1, 2009 for Canadian individuals who are at least age 18 and have filed an income tax return. The contributor must have a social insurance number, contributions are not tax deductible and investment income, capital gains and losses are not included in taxable income. Withdrawals are not subject to federal income tax.

At the provincial tax level, most provinces have announced that they will adopt the same approach for the taxation of TFSAs.

What remains to be addressed is whether provincially regulated benefits (such as disability benefits) and credits will be affected by TFSA assets or income.

Withdrawals

Withdrawals can be made at any time and can be used for anything – retirement, vacation, major purchase, to fund a parental leave, etc. There are no restrictions. The money you accumulate in a TFSA can be withdrawn at any time without tax consequences. Eligibility for federal income-tested benefits and credits such as Canada child tax benefit, working income tax benefit, goods and services tax (GST) credit, age credit, old age security benefits, guaranteed income supplement or employment insurance benefits is not affected.

Withdrawals will increase contribution room in the following year.

Contribution room

The 2009 contribution limit is $5,000. Unused contribution room can be carried forward indefinitely. Every resident of Canada who is age 18 or over will generate $5,000 of contribution room for 2009, regardless of income level.

The contribution limit will be indexed to inflation, rounded down to the nearest $500 for each year after 2009. Unused contribution room can be carried forward indefinitely like an RRSP and when withdrawals are made, the contribution room is not lost because withdrawal amounts are added back to the contribution room in the year following the withdrawal.

A penalty of one per cent per month is levied for over-contributions.

Contribution room example

This example shows the flexibility of the TFSA. You don’t lose contribution room if you don’t use it because you can carry it forward, and you can withdrawal your savings any time you need it. 

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Other rules

• Interest on money borrowed to invest in a TFSA is not tax deductible.
• TFSA assets can be used as security for a loan.
• TFSA transfers are allowed upon a marriage breakdown.
• Money can be given to spouses for contribution to their own TFSA without income attribution to the spouse who provided the money, as long as the investment stays in the TFSA.

 

On death

There is no income inclusion to the deceased client. If the client’s spouse is named the successor account holder*, the account will simply continue to be a TFSA and remain tax-free. Otherwise the proceeds of the TFSA will be paid out to his or her beneficiary* or estate, and any growth in value after the date of death will be taxable. Where a surviving spouse who was not named as the successor account holder receives the proceeds, they may make a contribution up to the value of the deceased’s TFSA at time of death to their own TFSA without affecting their contribution limit, provided they meet certain conditions.

*The validity of a designation of a beneficiary or successor account holder is subject to the laws of the jurisdiction where the client resides permitting a designation made otherwise than by way of a will.