PSFC - Tax Insights

Effective January 1, 2009, the new Tax-Free Savings Account (TFSA) became available to Canadians from all income levels and all walks of life. The TFSA allows Canadians to set money aside in eligible investment vehicles and watch those savings grow tax-free throughout their lifetimes. TFSA savings can be used to purchase a new car, renovate a house, start a small business or take a family vacation.

Canadians aged 18 and older can save up to $5,000 every year in a TFSA.
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for income tax purposes but investment income, including capital gains, earned in a TFSA will not be taxed, even when withdrawn.
Your TFSA may be used to purchase the same type of investments that are included in all arm’s-length RRSP investments, such as mutual funds, bonds, shares, etc.
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The amount withdrawn can be put back in the TFSA at a later date without reducing your contribution room.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.

A TFSA allows you to set money aside in eligible investments and watch those savings grow tax-free throughout your lifetime. Your TFSA savings can be withdrawn from your account at any time, for any reason, and all withdrawals are tax-free.

Capital gains and other investment income earned in a TFSA will not be taxed. Let’s assume that you earn $60,000 a year. That means if you were to contribute $5,000 at the beginning of each year at an annual interest rate of 5.00% for 5 years, you would enjoy roughly $1,785 of investment income tax-free.

The TFSA will also provide seniors with a tax-free savings vehicle to meet ongoing savings needs. Limited access to appropriate savings instruments occur at age 71 when investors are required to begin drawing down their registered retirement savings and this account is capable of providing balance. Seniors are expected to receive one-half of the total benefits delivered by the TFSA.

Neither income earned in a TFSA nor withdrawals will affect your eligibility for federal income-tested benefits and credits, such as the Guaranteed Income Supplement and the Canada Child Tax Benefit. This will improve incentives for people with low and modest incomes to save. It is estimated that, in the first five years, over 75 per cent of the benefits of TFSA savings will go to individuals in the two lowest income tax brackets.

You and your spouse are a modest-income couple expecting to receive the Guaranteed Income Supplement (GIS) in addition to Old Age Security and Canada Pension Plan benefits when you retire. You earn a combined $4,000 each year in interest income from the TFSA funds. Neither this income, nor any TFSA withdrawals, will affect the GIS benefits (or any other federal income-tested benefits and credits) they receive. If this $4000 were earned on an unregistered basis, it would reduce their GIS benefits by $2000.

I have withdrawn $20,000 tax-free from my TFSA to restore my classic Chevrolet. I am capable of re-contributing the $20,000 to my TFSA in the future without affecting other available contribution room. Had I used my RRSP savings, I would have needed to withdraw up to $37,000 to pay taxes and cover the cost of the restoration. This would have also resulted in lost contribution room in my RRSP.

You and your spouse are retired and living comfortably on your pension. Your spouse also receives a small pension and would like to use it to spend the winters in Florida. The TFSA will provide you two with an effective means to save for the trip south each year.