The Tax Free Savings Account, a Registered account was introduced in 2008 by the Federal Government of Canada. The account was designed to provide tax-free income.
If you are a Canadian resident age 18 or older, you are eligible to contribute to $5,500 a year to a TFSA- this is your annual contribution limit. The amount is indexed to inflation annually and rounded to the nearest $500. It is possible to have more than one TFSA, but total contributions cannot exceed your annual limit otherwise there maybe penalties.
Yearly TFSA Contribution Room:
| Year | TFSA Contribution | Total Available Room |
| 2009 | $5,000 | $5,000 |
| 2010 | $5,000 | $10,000 |
| 2011 | $5,000 | $15,000 |
| 2012 | $5,000 | $20,000 |
| 2013 | $5,500 | $25,500 |
| 2014 | $5,500 | $31,000 |
| 2015 | $10,000 | $41,000 |
| 2016 | $5,500 | $46,500 |
| 2017 | $5,500 | $52,000 |
| 2018 | $5,500 | $57,500 |
Is a TFSA right for you?
Unlike RRSPs, TFSA contribution room will not be tied to earned income. Regardless of income earned, contribution room will accumulate for each year you file a tax return. If you are not able to contribute the maximum amount to your TFSA in a year, the unused amount will carry forward to a future year.
Also, spousal attribution rules – rules designed to ensure spouses and common-law partners do not benefit from splitting income – don’t apply to TFSA contributions. This creates an opportunity for couples to gift assets to each other, allowing tax-free growth on TFSA contributions of $11,000 per family per year.
For Example:
John and Anna have been married for 10 years. Four years ago, John decided to retire. Anna is a nurse, and primary income earner for the family. Their financial advisor, Tony, introduced them to TFSAs as a way to increase their savings. Anna liked the idea, but was concerned that John’s lack of income would limit the family’s available TFSA contribution room.
Tony explained that TFSA room is not based on earned income. Because both file annual tax returns, both are able to contribute $5,500 a year to a TFSA. If at any time John does not have the funds to maximize his contributions each year, Anna can give him the money to do so, allowing total tax-free growth on $11,000 per year.
As a TFSA holder, although your contributions are not tax deductible, investment income earned and withdrawals are tax-free. As you withdraw amounts from your TFSA, the withdrawals can be re-contributed in a future year in addition to the contribution limit for that future year. Because of the combined effects of the carry forward provision and ability to re-contribute amounts withdrawn, you will generally not lose total TFSA savings room.
Note: A withdrawal in a year cannot be re-contributed in the same year unless you have contribution room to absorb it. The ability to re-contribute withdrawals begins the year following the withdrawal.
For Example:
Mary has been contributing to a TFSA for 8 years. Over that period, she made contributions of $5,000 per year for 2009–2012, $5,500 for 2013–2014, $10,000 for 2015 and $5,500 for 2016 and realized a return of 3% each year. Details of her plan are as follows:
Contribution $46,500
Growth $6,225
Total Value $52,725
Mary’s son Jim, recently enrolled in Post Secondary Education and required $40,000 to fund the overall costs. MAry decided to redeem $40,000 from her TFSA.
The next year, Mary received a bonus of $60,000 and because the withdrawals restore contribution room for the following year, she was able to contribute back the $40,000 and added an additional $5,500 for the new contribution for that year.
As indicated, TFSA contributions are restricted to Canadian residents and are subject to a limit of $5,500 per year, indexed annually. If you exceed this limit, or contribute while you are a non-resident, over-contribution penalties of 1% per month generally apply. Contribution room does not accumulate for any year in which you are a non‑resident.
Why to invest in a TFSA?
According to the federal government TFSAs are meant to be “flexible, registered accounts that will help Canadians with different savings needs over their lifetime.”Are there specific types of investors that the TFSA is best suited to?
TFSAs are suited to anyone with money to invest. Regardless of your age or time horizon, TFSAs can fit into a portfolio and should be considered part of any overall investment strategy. Here are four investor profiles.
1. Flexible Investor
Meg is a 50-year-old mother of two. While she earns enough to put money aside each year, she is reluctant to lock up her investments for the long term because she wants cash available for unpredictable expenses like home and vehicle repairs. But, in addition to having easy access to her money, Meg also wants market exposure and a higher rate of return.
Since RRSPs are best used for long-term investing, the consideration for Meg would likely be TFSA versus non-registered investing. Said another way, the question would likely become taxable versus non-taxable investing. Because of the wide selection of investments available in the TFSA, and also because of the tax-free status of TFSA investment income, the TFSA would likely be the better option. As her TFSA increases in value over the years, Meg can use some of the funds to make RRSP contributions if desired.
2. Low Income Investor
Jimmy, 23, is a new graduate who recently joined the workforce. Like many new graduates he is currently in the lowest tax bracket, and because Jimmy still lives with his parents, his expenses are low and he has money to invest.
Jimmy can consider an RRSP for his long-term investments. Contributions to an RRSP would provide him with a tax-deferral on a portion of his employment income. However, if Jimmy thinks he may require the assets in a year when he is in a higher tax bracket, the TFSA might be a better fit. Although a tax deduction would not be available at the time of contribution, future withdrawals (including income and capital gains earned) would be received tax-free. This is in contrast to a fully taxable RRSP withdrawal – a withdrawal that would be taxed at the higher tax bracket he finds himself in at the time of withdrawal.
3. RRSP Maximizer
Alex, a business owner, is able to maximize his RRSP each year. He is a fan of the RRSP primarily because of the annual tax deduction it provides. Because Alex is in the top tax bracket, he wants to shelter as much income from tax as possible. The problem is, other than the RRSP, there are very few tax shelters available in Canada.
The TFSA is another shelter available to Alex and one that can be used in combination with his RRSP. Because he is in the top tax bracket, tax deductions achieved by his annual RRSP contributions would likely continue to be of value. However, once his RRSP contribution limit is reached, excess funds can be invested in a TFSA for additional tax-saving opportunities. Furthermore, the tax refund generated from his RRSP contributions can be used to
fund TFSA contributions.
4. Retired Investor
Allen is a 72-year-old RRIF annuitant who, because of tax legislation, must begin to receive RRIF payments by the end of the year. Allen does not require the extra cash as his annual expenses are minimal and he is adequately provided for by Old Age Security (OAS), Canada Pension Plan (CPP) and pension income. Allen would like to continue to invest the money received from his RRIF, but is concerned that additional investment income could result in a claw back of income-sensitive OAS benefits.
The TFSA can help. The cash flow received from Allen’s RRIF can be reinvested in a TFSA. Unlike RRSPs, there is no maximum age restriction for TFSA contributions, so seniors can benefit from the plan the same as any other investor. Also, as opposed to being tax-deferred in the RRIF, future investment income will grow tax-free in the TFSA. Should Allen require cash from his TFSA thereafter, withdrawals can be made without affecting his OAS benefits.
INVESTMENT OPTIONS
There is a broad range of investments you can use in your TFSA, and they are generally the same as those you would include in your RRSP. Be careful of “non-qualified” or “prohibited” investments – if held, these investments may be subject to a tax of 50% of their fair market value. Income earned on these investments may also be taxable.
Non-qualified or prohibited investments are generally those deemed ineligible for all registered plans (e.g., RRSPs, RRIFs, DPSPs). Certain privately-owned corporate shares are an example. It is important to speak to a financial advisor to ensure your investment selections are suitable for TFSAs.
There is a broad range of investments you can use in your TFSA, and they are generally the same as those you would include in your RRSP. Be careful of “non-qualified” or “prohibited” investments – if held, these investments may be subject to a tax of 50% of their fair market value. Income earned on these investments may also be taxable.
Non-qualified or prohibited investments are generally those deemed ineligible for all registered plans (e.g., RRSPs, RRIFs, DPSPs). Certain privately-owned corporate shares are an example. It is important to speak to a financial advisor to ensure your investment selections are suitable for TFSAs.
Government of Canada Website Information: