Savings & Investments, Tips & Advice

Eleven Things You Need to Know About Tax-Free Savings Accounts

The Tax-Free Savings Account (TFSA) was introduced by the federal government in 2009, allowing Canadians to set money aside tax-free during their lifetime.

Here are eleven things you should know about TFSAs:

1) You have to be 18 years or older and have a valid Canadian social insurance number to open a Tax-Free Savings Account (TFSA).

2) Your TFSA can be a deposit, an annuity contract or an arrangement in trust, or you can set up a self-directed TFSA which you manage yourself, buying and selling different types of investments.

3) All the income you earn on that money and whatever money you withdraw from your TFSA account are generally tax-free, too.

4) Only the account holder can contribute to a particular TFSA. If you give your spouse or common-law partner money to contribute to their own TFSA, neither that money nor any interest earned on that money will be attributed back to you.

5) Since 2009, you accumulate TFSA contribution room every year if you are, as you see above, 18 or older, have a valid Canadian social insurance number and are a resident of Canada. You don’t have to officially open a TFSA or have filed income tax in a particular year to accumulate contribution room.

6) The TFSA dollar limit was $5,000 between 2009 and 2012. In 2013, the limit was increased to $5,500. However, your TFSA contribution limit is based on the TFSA dollar limit of any given year, plus any unused TFSA contribution room left over from the previous year, taking into account any withdrawals you made from your TFSA in the previous year. The Canada Revenue Agency provides a pair of examples that show how TFSA contribution room is calculated.

To figure out your TFSA contribution room, you may wish to use their RC343 – Worksheet – TFSA contribution room.

7) Having a TFSA account will not affect any government benefits or credits you receive, such as Old Age Security (OAS) benefits, Guaranteed Income Supplement (GIS),  Employment Insurance (EI) benefits or the goods and services tax/harmonized sales tax credit (GST/HST), just to name some of the most common ones. None of these will be reduced or clawed back.

8) You can put pretty well anything that you could put into a Registered Retirement Savings Plan (RRSP) into a TFSA such as:

  • cash;
  • mutual funds;
  • securities listed on a designated stock exchange;
  • guaranteed investment certificates (GICs);
  • bonds; and
  • certain shares of small business corporations.

9) You can also contribute foreign funds to your TFSA, although they will need to be converted into Canadian dollars on the date of your transaction and the total amount of your contribution cannot exceed your TFSA contribution room.

10) In kind contributions can also be made, as long as the involve qualified investments, such as guaranteed investment certificates (GICs), government and corporate bonds, mutual funds, and securities listed on a designated stock exchange. Once again, if it could go into an RRSP, it can generally go into a TFSA. (Note that when you make this kind of contribution, you will be considered to have sold the property at its Fair Market Value at the time of the contribution – meaning you may end up with a capital gain on your income tax return.  See LINK Blog Do You Have a Capital Gain? for more information on this.)

11) And one last thing you need to know about TFSAs – you definitely don’t want to over-contribute to one!