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Tax-Free Savings Accounts


Starting in 2009, Canadians have a new way to save money using a Tax-Free Savings Account (TFSA).

TFSA - Contribution Limit and Room

Residents of Canada, 18 years of age or older with a valid Social Insurance Number can now contribute up to $5,000 annually (to be indexed for inflation starting 2010). If contributions in a year are less than the allowed limit, the unused contribution room can be carried forward indefinitely, just as with RRSPs.

Unlike an RRSP, contributions to a TFSA are not tax-deductible; however, withdrawals from a TFSA are tax-free as is the income earned in the TFSA. Furthermore, TFSA withdrawals increase TFSA contribution room for future years.

There is no attribution of income to you when you give funds to your family members to contribute to their TFSAs, making a TFSA an effective income splitting tool.

Generally, the types of investments that can be held in a TFSA are the same as those in an RRSP with exceptions (notably shares in which the holder and/or related persons have an interest of 10% or more are ineligible).

There is no upper age limit for contributors, so individuals older than 71 may find this a useful savings vehicle since income earned in the TFSA does not affect income tested benefits and credits.

Tax Implications

• Income earned in a TFSA is not taxable.

• TFSA over contributions will be subject to a tax of 1% per month until there is no longer an excess.

• No attribution of income to you when you give funds to your family members to contribute to their TFSAs.

• TFSA service fees are not tax deductible.

• Losses in a TFSA cannot offset gains or income earned outside of a TFSA.

Income earned in, and funds withdrawn from, a TFSA will not affect income-tested federal benefits and credits, such as Old Age Security benefits (OAS), the Guaranteed Income Supplement (GIS), Employment Insurance (EI) benefits, the Working Income Tax Benefit (WITB), the Goods and Services Tax Credit (GSTC), the age amount and the Canada Child Tax Benefit (CCTB).

Non-residents of Canada

A TFSA is not available to non-residents of Canada. If you become a non-resident after opening a TFSA, you can keep your TFSA and continue not to be taxed in Canada on any earnings in the account or on withdrawals from it.

Death of TFSA Holder

Generally, a deemed disposition at fair market value (FMV) of the account will be triggered upon the death of TFSA holder. However, if your spouse or common-law partner is named as the sole beneficiary of the TFSA, there will be no deemed disposition and the TFSA can continue as a tax-free account with the spouse or common-law partner becoming the successor holder.

Otherwise, income that continues to be earned in the TFSA after death will be fully taxable to the recipient beneficiaries. If the TFSA exists for a prolonged period after death a deemed disposition and reacquisition of the trust property will occur and be taxable to the TFSA.

Overall, a TFSA is a good vehicle to save for short and long term needs, and it does not reduce eligibility for basic government support. Consider using a TFSA as part of your overall financial strategy.

For more information on how TFSAs can benefit you, please contact your local MNP advisor.