Tax-Free Savings Account – TFSA

In 2009, the Government of Canada introduced a new kind of savings account, in which the income does not get taxed, hence, Tax-Free Savings Account (TFSA). This is a good option and in my opinion should be quite attractive to people of all ages and income levels. It doesn’t matter what your income is, being able to avoid taxes on your income should be liked by everyone.

As usual, in order to accept something it’s best to first understand it, to avoid any misunderstanding. I would like to tell you in a little more detail about TFSA and some problems people run into (they are forced to pay penalty as they were not fully familiar with rules and restrictions of this program).

What is so special about Tax-Free Savings Account (TFSA):

• Deposits made into TFSA do not reduce the amount of taxes you pay in that year, in the future though, the deposited amount and the income earned, received as an interest, increase in capital (capital gain) or dividends, does not get taxed upon withdrawal.
• Anyone over the age of 18 is eligible to contribute to such account.

  Years for contributions	Annual Limit
  2009 – 2012	$5,000
  2013 – 2014	$5,500
  2015	$10,000
  2016 – 2018	$5,500
  2019 – 2022	$6,000
  2023	$6,500

  If you have never contributed to the TFSA, you are able to use the full limit amount. For example, in 2023 your contribution limit is $88,000 per person (if the person was eligible for TFSA since 2009).
• The account has to be an individual account. It can’t be a joint account as the advantages of the tax shelter are controlled on individual basis using SIN.
• Any moneys withdrawn from TFSA do not get taxed as they do not constitute income and do not affect assistance from government programs for low income families. (for example, Child Tax Benefit, GST credit, the Age credit, the Old Age Security and Guaranteed Income Supplement – GIS benefits). It is especially important for retirees as they usually worry about their retirement income supplement (GIS) being affected.
• If you did not contribute the whole amount his year, you can contribute the remaining in any later year. The room for deposits carries forward, same as RRSP.
• If you have taken money out of the account, you can redeposit these amounts in the future without losing the room available in your TFSA. You have to pay attention to annual and total limit of contribution to TFSA. If you have small amount on the TFSA account than you can withdraw and deposited money back any time during the year. But if you always contributing maximum amount in to this account than you have to be careful when you withdraw and depositing money back during the same calendar year. For example, if the person invested a total of allowed maximum and would like to withdraw $3,000, than this amount will be available for re-deposit only in the following year in addition to any standard deposits. RRSP programs do not allow this kind of withdrawal, if you have withdrawn money from your RRSPs, your limit (RRSP contribution room) will not increase the following year.
• Similar to RRSP, you can choose any type of investment within TFSA account..

Since you pay no taxes on income, the program can be used not only for retirement, but also short term savings plans, for instance, buying a house, a car, a vacation, etc..

TFSA can be even more attractive than RRSP to youth at the beginning of their career, as the income may not be that big but the program can yield quite large return.

Everything is great but some of us forget or chose to ignore that the deposits have to be accurate, without going over the available limit. If you have gone over the limit, a penalty of 1% a month is to be paid on the amount invested on top of the allowed limit. In 2011, many received a letter from CRA regarding a penalty that accumulated on their accounts.

Let’s focus on what we are not supposed to do:

• TFSA can be opened in many financial institutions but you may not go over the allowed limit. If you chose to transfer such an account from one institution to another, a special form needs to be filled out. If you have withdrawn money from one TFSA account and put them into another TFSA account, without proper documentation, it is viewed as two deposits in that year, resulting in possible penalties.
• Pay close attention to the process of depositing and withdrawing money into a TFSA. For example, if you never contributed into this account your maximum allowable limit in 2021 is $75,500. If you deposit $6,000, take it out in two months and re-deposit the same amount after one month (all transactions during one calendar year) you are within limits. The deposits will go on record as $12,000, which is still below total allowed limit for this year. However, if you deposited maximum every year and perform same operation as described above, you will have to pay penalties, as the limit for the previous years has already been used up. In a current year these transactions will exceed your limit of $6,000. You will be forced to pay a penalty of $60 for every month from the time you exceeded your limit until the end of the year, which may sum up to quite a bit.

Deposits into TFSA can be in a form of investments or guarantees. If we talk about guaranteed investments, currently, we can open an account with interest higher than the big banks offer, without locking your money in.

Our office hours are: 9 a.m. to 9 p.m., Monday through Friday and Saturdays by appointment.

This section was created using the government of Canada website http://www.cra-arc.gc.ca/tfsa/.