Canada Tax Free Savings Account Saves Tax Money
TFSA - Tax Free Savings Accounts Lower Canadian Income Tax Payments
Oct 28, 2009
The tax free savings account (TFSA) for Canadians was introduced in January 2009. It is a registered vehicle for general savings. Eligible Canadians can save by not paying tax on any of the income generated by their investments within the TFSA.
Who is Eligible to Contribute to the Canadian TFSA?
Any Canadian resident ages 18 and over can contribute to a tax free savings account. One does not need to be employed to do so but one does need a valid Social Insurance Number (SIN). Persons under the age of 18 are eligible to start contributions during the month that they turn 18.
How to Set Up or Open a Tax Free Savings Account in Canada
Banks, credit unions, and certain other financial service providers are able to set up a tax free savings account for a qualifying individual. They will require identifying information plus a valid Social Insurance Number. TFSA contribution room accumulates every year one is 18 or older and resident of Canada throughout the year. One does not have to actually set up an account in order to earn contribution room. However, there will be no tax benefit without one.
What is the TFSA Annual Contribution Amount?
Eligible individuals can contribute $5000 for the 2009 calendar year. If one does not contribute the full amount in any year, the leftover amount is carried forward. For example, if Bob only contributes $3000 into his TSFA in 2009, he will be able to contribute $7000 in 2010. $2000 leftover from 2009 plus $5000 for 2010 equals $7000. Note that in future years the contribution amount will be raised according to the inflation rate and rounded up to the nearest $500.00.
Must a Tax Return be Filed when Using a Tax Free Savings Account?
One does not need to file a tax return for the tax free savings account. However, it is beneficial to file as the CRA will calculate the correct contribution amount for next year’s TFSA.
Which Investments Qualify for Inclusion in the TFSA?
Mutual funds, GICs (Guaranteed Investment Certificates), bonds and eligible stocks on a designated stock exchange are some of the investments that one can hold in a TFSA. These investments are similar to the kinds that qualify for placement in an RRSP – Registered Retirement Saving Plan.
Other, more complex investments like property and mortgages can be part of a Self-Directed TFSA. Contact the plan issuer or the CRA website for details surrounding such vehicles.
Are Contributions to the TFSA Tax Deductible?
Unlike the RRSP, the principal amount of deposit into the account is not tax deductible. However the interest generated by this contribution is tax free.
How to Withdraw Money from the Canadian Tax Free Savings Account
Usually, one can remove money from the tax free savings account at any time without tax consequences. Removing this money does not change one’s eligibility to collect Old Age Security benefits or the Guaranteed Income Supplement.
If a person has contributed to the maximum for that year, any money removed from the account cannot be replaced until the following year. For example, Joan places $5000.00 in her tax free savings account. She removes $2000.00 for a new car, but decides to run her old car for a while longer. She cannot redeposit the $2000.00 until next year.
New Rules and Information on the TFSA for Canadians
New regulations have recently been implemented to the TFSA which involve harsher penalties for those who deliberately over contribute. However, this change will not affect most ordinary investors. Visit the Canada Revenue Agency or speak to a financial institution for up-to-date information.
Resource Credits
The article was researched using information from the Canada Revenue Agency website.
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