February 25, 2010
Tax-Free Savings Accounts were introduced effective 2009. Simply put, anyone 18 years of age or older can contribute to a TFSA and the income will not be taxable. The contribution room for 2009 was $5,000 and is scheduled to increase $5,000 annually plus inflation.
Some of the useful benefits:
1. The income is not taxable.
2. Funds can be taken out of a TFSA tax free. The contribution room will increase by the amount of the withdrawal in the subsequent year. Please note you cannot withdraw funds one day and replace them the next. You will end up with an over-contribution which is taxed at 1% of the over-contribution amount. Income from an intentional over-contribution will be taxed at 100%.
3. TFSAs can be used to income split. The attribution rules do not apply. Ordinarily, if you gift money to a spouse or child, you will have to include that income with your own income for tax purposes. As there is no income from a TFSA, the attribution rules do not apply.
4. If you are receiving benefits such as Old Age Security and are at risk of having some benefit clawed back due to income inclusions, the income from a TFSA will not count for the claw-back calculation. This might be particularly useful for people over 65 with significant dividend income. Dividends are included in the claw-back calculation for more than the amount actually received.
5. The TFSA can pass to your spouse on death without any tax consequence. The TFSA will continue to qualify as a TFSA for the spouse until withdrawal as long as the necessary forms are on file with the financial institution issuing the TFSA.
6. The rules for investments are the same as for RRSPs. You can hold publically traded shares. You may be able to hold some private company shares; professional advice should be sought.
Things to be aware of:
1. Contributions to a TFSA are not deductible.
2. As noted above, over-contributions are taxed at 1% of the over-contribution amount. The income from an intentional over-contribution is taxed at 100%.
3. A withdrawal will increase the contribution room but not until the next calendar year.
4. You can make qualifying transfers between TFSAs.
5. The interest on money borrowed to purchase a TFSA is not deductible.
6. The income from a TFSA may not be non-taxable in another country if you cease to be a resident of Canada. Consider collapsing the TFSA prior to becoming a non-resident.
TFSAs present opportunities. The amounts today may not appear to be significant but they will grow quite rapidly. Assuming no legislative changes, a family of two will have contribution room of $50,000 in 2013. If you have adult children you may wish to contribute to their savings. Assuming three adult children, the family limit in 2013 will be $125,000. Planning is essential in maximizing your benefits. We are happy to assist.