TSG (Tax Specialist Group) - The Tax-Free Savings Account (Tax Credits)

The Tax-Free Savings Account

Subject: Tax Credits
Number: 09-02
Date: 2/6/2009

The TFSA program offers taxpayers an opportunity to earn investment income tax-free

Starting in 2009, the TFSA program offers taxpayers an opportunity to earn a significant amount of investment income tax-free.

Unlike an RRSP, contributions to this new tax-assisted savings account are not tax-deductible; withdrawals of contributions and earnings are not taxable. TFSA contributions can only be made by an individual who is at least 18 years old. However, unlike an RRSP, there is neither an upper-age-limit nor any prerequisite for earned income.

Like an RRSP, investment income and capital gains earned on investments in the account are tax-free. Rules concerning permitted investments by an RRSP also apply to the TFSA.

A taxpayer can contribute up to $5,000 per year to a TFSA. An attractive feature of a TFSA is the lack of attribution of income for tax purposes.

Consequently, with careful planning, spouses should be able to avoid tax on the compound income they earn on total annual contributions of $10,000, from 2009. Parents can fund TFSA’s for children who are 18 or older.

The TFSA provides flexibility. Withdrawals from a TFSA are tax-free and can be made at any time. Amounts withdrawn from a TFSA (including accumulated income and gains) can be recontributed at any time. Any unused contribution room (like an RRSP) can be carried forward indefinitely.

The income earned in the TFSA, or amounts withdrawn from a TFSA, will not affect income, so they will not result in reductions to Old Age Security, Guaranteed Income Supplement, Employment Insurance, eligibility for the Canada Child Tax Benefit (CCTB), the Goods and Services Tax Credit (GSTC), the Working Income Tax Benefit (WITB), or the age credit.

The TFSA will provide an additional source of retirement income to all Canadians, particularly individuals over 18 with no earned income. However, the TFSA rules are deceptively complex and a tax advisor should be consulted before making any contributions, investments or withdrawals.

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The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.