By now you have probably heard some information about the new Tax Free Savings Accounts available to Canadians either on the news or through TV commercials that are currently running. Maybe you have some questions, or are not sure what they are all about? Hopefully the information provided below will answer all of your questions and then some.
Until the year 2009, most Canadians will have held their savings in their RRSP, where they could claim a deduction on their contributions, while have the growth of the account go tax deferred until retirement or withdrawal. The newest savings vehicle available to Canadians is called a Tax-Free Savings Account (TFSA). Whether you are saving for the short term (0-5) years or for the longer term (6+) a TFSA could be a valuable addition to your financial plan. So what is it all about? Well here are some frequently asked questions and answers taken right from our own Government of Canada’s web site that will provide most of the information to bring you up to speed.
Q.1 What is the Tax-Free Savings Account (TFSA)?
A.1 The TFSA is a registered savings account that allows taxpayers to earn investment income tax-free inside the account. Contributions to the account are not deductible for tax purposes, and withdrawals of contributions and earnings from the account are not taxable.
Q.2 Who would be eligible to open a TFSA?
A.2 Any individual (other than a trust) who is resident in Canada and 18 years of age or older would be eligible to establish a TFSA.
You would be able to open an account at most financial institutions such as Canadian trust companies, life insurance companies, banks, and credit unions (the same institutions that are currently eligible to issue a Registered Retirement Savings Plan). You would have to provide the issuer with your social insurance number when the account is opened. You would be permitted to hold more than one TFSA.
Q.3 When can I open a TFSA?
A.3 January 2009.
Q.4 How much can I contribute to the TFSA per year?
A.4 Each year you can contribute an amount up to your contribution room for the year. Your contribution room would be made up of three amounts:
1. Each year you would be allocated and allowed to contribute at least $5,000 (this annual amount will be indexed to inflation and rounded to the nearest $500 on a yearly basis). See also Q.14.
2. Any withdrawals made in the previous year would be added to the contribution room for the year.
3. Any unused contribution room from the previous year would be added to the contribution room for the year.
For example (assuming no indexing):
• In 2009 you would be allocated and allowed to contribute up to $5,000. If you only contribute $2,000, an amount of $3,000 would be carried forward to 2010.
• Your contribution room for 2010 would then be $5,000 plus $3,000, or $8,000.
• If in 2010, you do not contribute but decide to withdraw $1,000, your contribution room for 2011 would be $5,000, plus $8,000 (carried forward from 2010), plus the $1,000 withdrawn, or $14,000.
Q.5 If I don't have the money to invest in a given year, would I be able to use any unused contribution room in a future year?
A.5 Yes, there no limit on the number of years unused contribution room could be carried forward.
Q.6 What happens if I contribute more than my contribution room?
A.6 Excess contributions would be subject to tax of one per cent per month, for each month that the excess remains in the plan.
Q.7 Would there be any restrictions on withdrawals?
A.7 No, you could withdraw any amount in the account for any reason.
Q.8 Would contributions and withdrawals have any impact on my taxes and income-tested benefits?
A.8 No, contributions to a TFSA are not deductible in computing income for tax purposes, and no amount earned in or withdrawn from a TFSA would be included in computing income for tax purposes.
Withdrawals would not be taken into account in determining eligibility for income-tested benefits or credits delivered through the income tax system (for example, the Canada Child Tax Benefit, the Working Income Tax Benefit, the goods and services tax credit, and the age credit).
Furthermore, these amounts would not reduce other benefits that are based on the individual's income level, such as Old Age Security benefits, the Guaranteed Income Supplement, or Employment Insurance benefits.
Q.9 What kind of investments could I hold in my TFSA?
A.9 A TFSA would generally be permitted to hold the same investments as a registered retirement savings plan. This would include savings accounts, mutual funds, publicly traded securities, GICs, bonds, and certain shares of small business corporations.
Q.10 Is interest on money borrowed to invest in my TFSA tax-deductible?
A.10 No, interest on money borrowed to invest in a TFSA would not be deductible for tax purposes.
Q.11 Could I use my TFSA assets as security for a loan?
A.11 Yes, you could use the TFSA assets as security for a loan.
Q.12 If I provide funds to my spouse or common-law partner to invest in a TFSA, would the income earned in that account be attributed back to me?
A.12 No, the attribution rules would not apply to income earned in a TFSA where you provide funds to your spouse or common-law partner to take advantage of their TFSA contribution room.
Q.13 What happens if the account holder passes away?
A.13 Generally, earnings that accrue in the account after the account holder's death will be taxable, while those that accrued before death would remain exempt. However, it would be possible to maintain the tax-free status of the earnings if the account holder names his or her spouse or common-law partner as the successor account holder. Alternatively, the assets of the deceased's TFSA could be transferred to the TFSA of the surviving spouse or common-law partner without any impact on the survivor's existing contribution room.
Q.14 Could I still contribute to a TFSA if I become a non-resident of Canada?
A.14 If you become a non-resident, you would be allowed to maintain your TFSA, and you would not be taxed on any earnings in the account or on withdrawals; however, you would not be allowed to contribute, and no contribution room would accrue for any year throughout which you are a non-resident.
Q.15 What would happen if there was a breakdown of a marriage or a common-law partnership?
A.15 In such a situation, an amount could be transferred directly from one spouse or common-law partner's TFSA to the other's. The amount of the transfer would not affect either person's contribution room.
Q.16 How would I know what my TFSA contribution room is for a given tax year?
A.16 The CRA would determine TFSA contribution room (based on information provided by issuers) for each eligible individual who files an annual T1 individual income tax return. Individuals who have not filed returns for prior years (because for example, there was no tax payable) would be permitted to establish their entitlement to contribution room by filing a return for those years or by other means acceptable to the CRA.
Hopefully that will provide you with enough information to inquire about the TFSA with your Financial Advisor. Here at Algoma Financial, we can accept early applications now, and can provide you with advice and printed marketing material to help you make the best decision for your tax-free savings.
