Tax Free Savings Accounts (TFSA)

A relatively new type of tax assisted savings plan for Canadians, these plans were created effective the 2009 tax year. After years of lobbying the efforts of the various players were rewarded with the introduction of TFSA's.  With increasing life expectancies and a low savings rate, there was a need to incentivize Canadians to save more.  

TFSA's are available from independent financial advisors as well as advisors affiliated with financial institutions.  There has been a misconception among many Canadians that they were only available from banks, and the investments that could be held in TFSA's were only savings account.  That is not the case; any investment that can be owned in an RRSP can be owned in a TFSA.

Effective the 2017 tax year, the maximum available TFSA contribution room each year is $5,500. When the plans commenced in 2009 the limit was $5,000 however the amount is indexed to the rate of inflation to the nearest $500. Every Canadian with a SIN number over the age of 18 and files a tax return accrues $5,500 of TFSA room yearly.  If you do not contribute your room is carried forward.  As of 2017 the total available room if a contribution has not been made is $52,000.

Once after tax dollars are deposited to the plan any investment income earned is not taxed.  There are no tax slips sent out and the income doesn't show up on a tax return.  When money is withdrawn from a TFSA there is also no tax. This means that this income has no effect on income tested government benefits such as Old Age Security or Guaranteed Income Supplements.  For this reason they are a better vehicle than RRSP's for lower income Canadians.

Another way they are different than RRSP's is that money withdrawn from a TFSA can be re-contributed in a future year - not only the original amount deposited but any profit that is withdrawn can be re-contributed.

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 which can reduce or eliminate OAS or GIS as mentioned above.

To find out more information about Tax Free Savings Accounts, and to determine if they are a suitable vehicle for you to save money, please contact us.