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Tax-Free Savings Account (TFSA)

TFSA’s are registered savings accounts similar to registered retirement accounts, but unlike RRF’s, contributions to a TFSA will not be deductible. The advantage of TFSA’s is income and gains (and conversely, losses) in respect to investments held within a TFSA are not included in income when any amounts are withdrawn. Every year, since 2009, $5,000 or more of TFSA contribution room will be issued and any unused contribution room will be carried forward to future years, with no limit on the number of years that unused contribution room can be carried forward. When withdrawals are made, that amount will be added to the following year’s contribution room. The TFSA limits can be found here.  

TFSA limits

For example, if an individual only contributed $3,000 in 2009, an amount of $2,000 would be carried forward to 2010 and the contribution room for 2010 would then be $5,000 plus $2,000, or $7,000. If in 2010, $1,000 is withdrawn, but no contributions are made, the contribution room for 2011 would be $5,000, plus $7,000, plus the $1,000 withdrawn, or $13,000.

For certain individuals, the use of a TFSA can provide advantages beyond just the tax savings on investment income. Examples are:

Seniors – the use of TFSA allows for continued investment earnings while not impacting an individual’s taxable income level.

Low income taxpayers – if low income earners are not able to utilize an RRSP deduction, they could earn tax-free income in a TFSA, depending on their situation concerning the GST credit and Child Tax Benefit.

Persons with no earned income – since RRSP’s are not available to these individuals, they could deposit excess funds to a TFSA. If they should start earning income, they could withdraw the TFSA funds tax free and re-contribute them into an RRSP account.

There is no benefit to having dividend-bearing securities or investments providing capital gains in the TFSA as any tax advantage would be lost. Interest bearing accounts, however, are perfect candidates for TFSA’s, since the interest will not be taxed in a TFSA.

Interest on money borrowed to put into a TFSA is not tax-deductible. It is also important to check the fees charged by the financial institution before opening a TFSA.

Excess contributions will be subject to a tax of one percent per month.

TFSA Contribution Limits