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  • Latimer Financial

TFSAs (Tax-Free Savings Account)

What is a Tax-Free Savings Account? It is a relatively new type of tax-assisted savings plan introduced in 2009. TFSA contributions, which can include investments you already own, are not tax-deductible but you can withdraw this income and your contributions to your TFSA at any time tax-free. We’ve heard many of you ask things like, “What do they pay?” or “What are their numbers like?” Both honest questions. However, the TFSA is not the investment, rather it is merely the wrapper on the investment, much like an RRSP is an investment which has a “registered” wrapper on it. Essentially anything that is eligible for investment as an RRSP is eligible for the TFSA. The biggest advantage with the TFSA is that all investment income, interest and growth is tax free. Tax free now and tax free later. You don’t pay any tax on the growth as you earn it. Nor do you pay any tax on the growth as you receive it. (However, you don’t receive a tax deduction for what you deposit as you do with an RRSP so the “invested capital” that you eventually redeem is your own after tax dollars coming back to you). Other advantages include:

  • As long as you are 18 years old or older and file a tax return, you may contribute to a TFSA.

  • Everyone has the same opportunity, regardless of income. That is, what you can contribute does not depend on how much you make.

  • Withdrawals from a TFSA do not affect means tested government benefits like the Old Age Security or the OAS Supplement.

  • “Unused” deposit room may be carried forward, indefinitely.

  • In the event of your death, you may pass your TFSA on, again tax free, to your “successor – holder” spouse.

  • What is withdrawn from a TFSA may be replaced later, on top of your current contribution room.

Who can contribute to a TFSA?

  • Canadian residents

  • At least 18 years of age

  • Annually file a tax return

How much can you contribute?

  • Up to and including 2016, the total new contributions or deposits you are allowed to make are $46,500.

    • $5,000 for each of years 2009 through 2012;

    • $5,500 for each of the years 2013 and 2014;

    • $10,000 for the year 2015;

    • And…$5,500 for the year 2016.

  • Any unused contribution room can be carried forward indefinitely.

  • You may hold more than one TFSA, subject to your contribution limit.

  • Unlike RRSPs, there is no cushion for excess contributions to a TFSA.

    • The penalty for over contributing is 1% of the excess for each month the excess is allowed to exist.

Withdrawing funds

  • You may make a tax-free withdrawal from a TFSA at any time.

  • The amount withdrawn is added to the contribution room for the following year and can be re-contributed in the future

    • Note that the re-contribution cannot be made in the same year as the withdrawal. It must be made in a later year.

    • The same rule applies to any interest or investment growth that is withdrawn.

Income splitting opportunities for families

  • TFSAs may offer an opportunity for income splitting for families in which one spouse has more income than the other.

  • You can give funds to your spouse to contribute to his or her own TFSA as long as your spouse has the available contribution room. The normal income attribution rules that would tax the investment income in your hands will not apply.

Which investments qualify?

  • TFSAs are generally allowed to hold the same qualified investments as RRSPs such as cash, guaranteed investment certificates, term deposits, mutual funds, government and corporate bonds, publicly traded securities, and in certain cases, shares of small business corporations.

  • You can transfer investments you already own into your TFSA.

  • TFSAs cannot hold investments in “non-arms’s length entities,” which are generally companies in which you, your spouse and other related persons, either individually or collectively, own 10% or more of the shares.

  • Money borrowed and fees incurred to invest in a TFSA are not tax-deductible.

  • Unlike an RRSP, a TFSA can be used as collateral for a loan.

  • When choosing investments, keep in mind that capital losses realized in a TFSA cannot be claimed against capital gains realized outside the TFSA.

RRSPs versus TFSAs A TFSA is like a mirror image of an RRSP:

  • RRSP contributions are tax-deductible but contributions and investment earnings are taxed when you withdraw them.

  • TFSA contributions are not tax-deductible but withdrawals of contributions and investment income are tax-free.

  • As such, your best tax strategy for dividing your investments between TFSAs and RRSPs may depend on any differences between your current tax bracket and the one you expect to be in which you start withdrawing funds from your RRSP.

Death A TFSA is like a mirror image of an RRSP:

  • Generally, investment income earned in the TFSA after the account holder’s death is no longer tax-exempt. If there is a surviving spouse and the spouse is named as the successor account holder, the TFSA will continue to exist.

  • The successor spouse will not have to pay tax on the TFSA’s value on his or her spouse’s death or on any future income earned in the account. This rollover of the account to the successor will not affect the successor’s unused TFSA contribution room.

  • If no successor holder exists but the account holder has designated beneficiaries, these beneficiaries will receive the TFSA’s value at the account holder’s death tax-free. Any income earned in the account after the account holder’s death will be taxable to the beneficiaries. If the beneficiaries have unused TFSA contribution room, they can roll over the amount received to their own TFSAs.


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