Please click on the e-courier symbol below to send us a confidential file or message. If you do not already have an e-courier guest account, please let us know and we will set it up for you.


Home TAX TIPS Our Tips Tax Free Savings Accounts

Tax Free Savings Accounts

It’s been nearly two years since the introduction of tax free savings accounts (TFSA). Early adopters opened such accounts already, whereas others still consider setting one up. With the end of the year approaching, we’ll take a closer look at TFSA, should you wish to consider it as part of your investment strategy in the new year.

1.     TFSA can be opened by any Canadian resident who is at least 18 years of age. TFSA cannot be set up for trusts or businesses though. Any financial institution can set up a TFSA and you have a wide choice of investments that can be held in TFSA, such as bonds, mutual funds, GICs, publicly traded shares or eligible shares of private corporations. Generally, types of investments that are RRSP eligible are also TFSA eligible.

2.     Contributions to TFSA do not work the same way as RRSP contributions. They are not deductible for tax purposes, but interest earned within those accounts is not taxable.

3.     Contribution limit is 5,000 per year. If you don’t contribute in any year you can carry forward this unused room indefinitely. You can make withdrawals at any time with no tax implications.  However, this is the point that requires elaboration as it caused the most problems so far. Let’s say you contribute the full $5,000, then withdraw $3,000 and contribute it to another TFSA account a few months later but within the same year. That $3,000 will be considered as over-contribution and subject to 1% per month penalty imposed by CRA. If you wish to move your funds between different TFSAs you must do that through your financial institution as a direct transfer. Note that contributions and withdrawals from TFSA are reported to CRA by your financial institution at the end of each year.

4.     If your investments held in TFSA decline in value and go below the cumulative contribution limit you cannot top up your TFSA to the prescribed limit.

5.     Funds can be given to a spouse or common law partner to contribute to TFSA and attribution rules will not apply. However, if you plan to take an investment loan to contribute to TFSA, interest on such loan will not be tax deductible.

We often get questions as to what type of investments should be held in TFSA. Ideally, you want to purchase into TFSA what produces the largest gain from the tax perspective. Generally, fixed income is taxed at the least preferred rate, but today, it’s not easy to generate substantial growth through bonds or GICs. On the other hand if you expect some stock to perform fabulously and produce a sizeable capital gain, you may be better off putting it through TFSA. Even though only 50% of capital gains are included in your income, such amount may be much larger than 1% interest you earn on your GIC.

And remember, starting in January 2011, your total contributions to TFSA over three years can be $15,000. If this money grows, it’s worth shielding it from tax!