What is a TFSA?
In the 2008 Budget, Minister Jim Flaherty announced the creation of this new savings vehicle. While the TFSA is similar to an RRSP there are some notable differences. As with a RRSP, the account is intended to help Canadians save money and plan for future expenses. The contributions you make to the TFSA are made with after-tax dollars but withdrawals are tax-free. So whether saving for a new car or a new house, tax-free savings may help you get there.
Available to Canadians 18 and older, the TFSA will allow you to invest up to $5,000 annually, and carry forward any unused contribution room from year to year. There will be no lifetime contribution limit.
For savvy investors who realize significant capital gains in these accounts, the best thing about the TFSA is that there is no tax on investment income, including capital gains! How good is that?! This is the main difference between the TFSA and a RRSP account.
Some of the details from the Conservative Budget:
- Starting in 2009, Canadian residents age 18 or older will be eligible to contribute up to $5,000 annually to a TFSA, with unused room being carried forward.
- Contributions will not be deductible.
- Capital gains and other investment income earned in a TFSA will not be taxed.
- Withdrawals will be tax-free.
- Neither income earned within a TFSA nor withdrawals from it will affect eligibility for federal income-tested benefits and credits.
- Withdrawals will create contribution room for future savings.
- Contributions to a spouse’s or common-law partner’s TFSA will be allowed, and TFSA assets will be transferable to the TFSA of a spouse or common-law partner upon death.
- Qualified investments include all arm’s-length Registered Retirement Savings Plan (RRSP) qualified investments.
- The $5,000 annual contribution limit will be indexed to inflation in $500 increments.
According to the Budget release, “in recognition of the fact that couples often make their savings decisions and plan for their financial security on a joint basis, individuals may contribute to the TFSA of their spouse or common-law partner, subject to the spouse or partner’s available contribution room.”