Tax-Free Savings Account - RBC Direct Investing

In the 2008 Federal Budget, a new Tax Free Savings Account (TFSA) was announced by the Government of Canada. The TFSA will be available for contributions starting in 2009.

What is the TFSA?

The TFSA will allow Canadians to save for the future in eligible investment vehicles without incurring tax on investment income – interest, dividends or capital gains. TFSA savings can be used for any type of purchase or goal such as home renovations, a family vacation, to start a small business or even to supplement retirement savings.

As of January 2009, Canadian residents, who are 18⁺ years or older and have a Social Insurance Number, are eligible to open a TFSA. Unlike a registered retirement savings plan (RRSP) individuals over the age of 71 can open and contribute to a TFSA. There is no minimum or maximum income level – every eligible person will accumulate contribution room each year starting in 2009.

⁺ The age of majority is 19 for residents of Newfoundland and Labrador, New Brunswick, Nova Scotia, British Columbia, Northwest Territories, Yukon and Nunavut which may delay the opening of a TFSA. However, the accumulation of contribution room will start at age 18.

Key benefits of an RBC Direct Investing TFSA

TFSA Contributions
Contribution limit of $5,000 per year; the limit will be adjusted for inflation, by $500 increments (subject to government guidelines). Unlike an RRSP there is no requirement to have earned income to contribute Unused contribution room can be carried forward indefinitely – there is no limit on the number of years or the amount Excess contributions will be subject to tax of 1% per month, for each month that the excess remains in the plan Example: If you contribute $3,500 to a TFSA during 2009, you will be able to carry forward $1,500 in unused contribution room. This means that in 2010 you will be able to contribute $6,500 ($5,000 annual limit for 2010 and $1,500 in unused contribution for 2009). The above example assumes there are no adjustments to the annual contribution limit due to inflation.
Contributions are not tax-deductible for income-tax purposes, but earned investment income (interest, dividends, capital gains) are not taxed.
Similar to RRSPs, the Canada Revenue Agency (CRA) will track your contribution room. CRA intends to report this amount to individuals on their Notice of Assessment and through the “My Account” function on the CRA website.

TFSA Withdrawals

Withdrawals will be allowed at any time for any purpose (i.e purchasing a car, vacation, home renovations) and they will not be taxed.

Contribution room is not lost if you make a withdrawal. However, you need to wait until the next calendar year to re-contribute the money.

Example: You contribute $3,000 per year to a TFSA for 10 years, for a total of $30,000; unused contribution room = $20,000. You earn investment income, including capital gains of $10,000 over the 10 years, which brings your TFSA balance to $40,000.

If you decided to withdraw the $40,000 during year 10 you can do so with no tax consequences. Your contribution room for year 11 is $65,000 ($40,000 withdrawal, $20,000 unused contribution room, $5,000 annual contribution for year 11).

The above example assumes there are no adjustments to the annual contribution limit due to inflation.

Other considerations
Although you cannot contribute to your spouse or common-law spouse’s TFSA, money you give for him or her to invest in their own TFSA will not be subject to CRA’s income attribution rules.
Interest on funds borrowed to fund the TFSA are not tax deductible.
Income earned and withdrawals have no impact on federal income-tested benefits or credits (Guaranteed Income Supplement, Child Tax Benefit, Old Age Security, etc.).

Where can I get more information on the TFSA?

Please refer to the following Government of Canada websites for addition information on the TFSA:

The information provided on the Tax-Free Savings Account is based on what has been communicated by the Canadian Government.