Tax Free Savings Account
Tax- Free Savings Account (TFSA) The Federal Government has introduced a new registered savings account that allows taxpayers to earn investment income tax-free. The Tax-Free Savings Account (TFSA) is available beginning in 2009 to Canadian Residents age 18 or older. TFSA allows taxpayers to set money aside in eligible investment vehicles and watch those savings grow tax- free throughout their lifetime.
There are no restrictions on the way TFSA funds (contributions and earnings) may be used (i.e. purchase a car, renovate a home, start a small business, take a family vacation, or just save for 'a rainy day'). All income levels and all walks of life can benefit from a TFSA. But only a careful review of each person's financial situation will determine how to optimize use of RRSPs, RESPs,RRIFs and TFSAs.
Types of TFSAs
There are three basic types of TFSAs: deposit-type P plans, mutual funds, and self directed plans. Credit unions, trust companies, mutual fund companies, life insurance companies, banks and investment dealers are able to offer TFSAs. While all TFSAs provide the same benefits, not all plans are the same. Each financial institution may offer one or more ways to invest your money, and the growth rates, terms, conditions, availability of deposit insurance, and fees may vary.
TFSA Eligibility
The individual owning the TFSA is the 'Holder'. Any individual person (not trusts or corporations) who meets all of the following three:
- Resident in Canada, and
- 18 years of age or older, and
- Holds a valid Social Insurance Number (SIN)
There is no maximum age limit to open or hold a TFSA and a person may hold more than one TFSA.
TFSA Contribution Limit
Contributions to a TFSA may only be made by the Holder and the amount is not tied to the income of the Holder.
- $5,000 is the maximum TFSA contribution limit for each year beginning in 2009.
- After 2009, the $5,000 maximum contribution limit may be increased depending on the rate of inflation; rounded to the nearest $500 e.g. if the rate of inflation in 2009 is 5.196, in 2010, the maximum would increase to $5,500 ($5,000 x 5.1% = $255; nearest $500 is $5,500). Therefore the limit will increase some years, but not every year.
- Contributions are not tax deductible.
NOTE: The Holder is responsible for ensuring the maximum contribution limit is not exceeded. An excess contribution will result in a penalty tax of 1 % per month for each month that the access contribution remains in the TFSA.
Non-resident Holder
When a Holder is no longer a resident of Canada, the following rules apply:
- The TFSA may remain open.
- No contributions may be made.
- Non-resident Holder will not accumulate contribution room.
- Withdrawals will not increase contribution room.
- If a non-resident Holder makes a contribution, the Holder is subject to a 1% per month penalty tax for each month that the contribution remains in the TFSA.
If the Holder becomes a resident of Canada, contribution room will commence accruing and the Holder may make future contributions.
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