TFSA: Tax-Free Savings Accounts

MacDougall, MacDougall & MacTier Inc. now offer the new Tax-Free Savings Account (TFSA); a great way for all Canadian residents age 18* and older to earn investment income without paying taxes.

The TFSA is a new tax sheltered account that allows you to meet your short and long term investment goals. This extremely flexible account allows you to save money for major purchases, to put away more money for retirement or just to have money available when you need it. It can also be a great solution if you have attained your maximum RRSP contribution amount for the year.

MacDougall, MacDougall & MacTier Inc. does not charge service fees for the TFSA.

*The age of majority is 19 in certain provinces and territories.


Tax-Free Savings Account Q & A
1. What is a Tax-Free Savings Account (TFSA)?
2. Who is eligible for a TFSA?
3. When can I open a TFSA?
4. How is a TFSA different from an RSP?
5. How much can I contribute?
6. What if I can’t contribute the full $5,000?
7. How will I know what my contribution limit is for each year?
8. Can I contribute more than my limit in a particular year?
9. Can I make spousal contributions to my spouse’s TFSA?
10. When can I withdraw my money?
11. Do I have to pay income tax on my withdrawals?
12. What can I spend the money on?
13. Once I’ve withdrawn my money, is that contribution room lost?
14. Are there any restrictions on withdrawals?
15. Do I have to pay tax on my money?
16. Are my contributions tax-deductible, like RSP contributions?
17. What kind of investments can I hold in my TFSA?


1.
Q: What is a Tax-Free Savings Account (TFSA)?
A: A Tax-Free Savings Account (TFSA) is a new kind of registered account recently announced by the Federal government. Through a TFSA, you can put your savings into eligible investments and not pay tax on the investment income you earn.

2.
Q: Who is eligible for a TFSA?
A: The idea behind TFSAs is to make the benefits of tax-free savings available to as many Canadians as possible. For that reason, TFSAs are available to every Canadian resident who is 18 years of age or older and has a Social Insurance Number (SIN).
If you live in British Columbia, Newfoundland and Labrador, Nova Scotia or New Brunswick, then you can’t actually open a TFSA until you are 19, which is the age of majority in those provinces. However, you will accumulate contribution room from the time you are 18.

3.
Q: When can I open a TFSA?
A: As of November 17, 2008, you’ll be able to open a TFSA through 3Macs. However, your 2009 contribution may not be made prior to January 2, 2009

4.
Q: How is a TFSA different from an RRSP?
A: An RRSP is designed specifically to provide you with income after you retire. Your contribution limit is based on your income and the contributions you make are tax-deductible, but you do pay tax on the money when you receive it as income.
A TFSA is not designed specifically for retirement, but to help you save money for a wide range of goals. The amount you can contribute is not based on your income and your contributions are not tax-deductible. You can withdraw your money any time you want it, and you don’t pay tax on those withdrawals. You also don’t lose contribution room when you make a withdrawal – you can re-contribute that amount to your TFSA the following year or any year after that.

5.
: How much can I contribute?
A: As of January 2, 2009, you can contribute up to $5,000 a year to your TFSA. However, that contribution limit is indexed to inflation, which means that it will rise with the cost of living.

6.
Q: What if I can’t contribute the full $5,000?
A: You can carry forward any un-contributed amounts into future years indefinitely. So, for example, if you contributed only $3,000 in 2009, in 2010, you could contribute up to $7,000 (the $5,000 limit for 2010, plus the $2,000 you had left over from 2009).
If, in 2010, you had only $5,000 to contribute, you could carry the $2,000 left over from 2009 to 2011 and on through the years until you use it.

7.
Q: How will I know what my contribution limit is for each year?
A: Every year, the government will calculate how much TFSA contribution room you have available. You will be informed of your contribution limit when you receive your T1 Notice of Assessment.

8.
Q: Can I contribute more than my limit in a particular year?
A: If you contribute more than your contribution limit, you will pay a penalty of 1% per month on the excess amount.

9.
Q: Can I make spousal contributions to my spouse’s TFSA?
A: No, you can’t contribute directly to your spouse’s TFSA as you can with a spousal RSP. However, you can give your spouse money, which they can then contribute to their own TFSA. Any income your spouse earns on the money in their TFSA is theirs and will not be attributed back to you.

10.
Q: When can I withdraw my money?
A: You can withdraw funds from your TFSA any time you want – you don’t have to reach a certain age before you withdraw your money.

11.
Q: Do I have to pay income tax on my withdrawals?
A: No, you don’t have to pay tax on the amounts you withdraw.
Because TFSA withdrawals don’t count as taxable income, they don’t affect Federal income-tested benefits or tax credits you may receive, including the Canada Child Tax Benefit, the Working Income Tax Benefit, the Goods and Services Tax Credit and the Age Credit. TFSA withdrawals also won’t reduce benefits based on your income level, such as Old Age Security, the Guaranteed Income Supplement and Employment Insurance benefits.

12.
Q: What can I spend the money on?
A: Anything you want. You could wait until you retire and use it to supplement retirement income you have from pensions, RRSPs or other sources, but you can also use it for short-term savings goals like a new car or a vacation, or for needs that arise suddenly like repairs to your home.

13.
Q: Once I’ve withdrawn my money, is that contribution room lost?
A: No, you never lose your contribution room – in fact, you can re-contribute amounts you have withdrawn. You have to wait until the next year to re-contribute, but you can carry forward the re-contribution room indefinitely.
For example, say you contribute $5,000 to your TFSA in January 2009 and another $5,000 in January 2010. Then, in the summer of 2010, you withdraw $4,000 to pay for some repairs to your home. You can’t re-contribute that $4,000 in 2010, but in 2011 it will be added to your contribution room again, meaning you could contribute up to $9,000 in 2011.

14.
Q: Are there any restrictions on withdrawals?
A: No, you can take out as much of your money as you want, whenever you want, and use it for anything you choose.

15.
Q: Do I have to pay tax on my TFSA investments?
A: No, you don’t pay any tax on the investment income you earn in the account, and you don’t pay income tax on the amounts you withdraw.

16.
Q: Are my contributions tax-deductible, like RRSP contributions?
A: No, you can’t deduct contributions to your TFSA from your income as you can with your RSP contributions.

17.
Q: What kind of investments can I hold in my TFSA?
A: You can hold many of the same investments you hold in your RRSP in your TFSA, including mutual funds, GICs, stocks and bonds.

Note: The above information about the Tax-Free Savings Account is based on the information currently available from the Canadian government. To learn more or to check for updates, visit the TFSA information page on the Canada Revenue Agency website.