The Mighty TFSA

Tax Free Savings Accounts (TFSA)

Many of you are probably familiar with the saying: “the only sure things in life are death and taxes.” Well, as of January 2009 there’s been a little ray of hope as far as those taxes are concerned. In February of 2008 the Canadian Minister of Finance (Jim Flaherty) announced a new program would start in 2009 that would forever change how Canadians can choose to save their hard-earned money.

Before the TFSA was introduced, if you saved or invested your money(the money you would have already been taxed on) you would then go on to be charged more taxes if those savings or investments made money. Many Canadians felt that they were being punished despite trying to do the right thing by saving or investing. While many of those same rules are still in place, the reason a TFSA is so innovative is because it gives Canadians an option to save and grow their money without having to pay any taxes on it. Sounds like a great option to us.

What is a TFSA exactly?

A TFSA is a special type of account that enables Canadians to grow the money in the account tax-free. Whether the money is in cash or is invested in allowable products (such as stocks or GIC’s) any money made within a TFSA account will not be taxed. For example, when most people saved money in a bank they generally put the money is a savings account. Aside from keeping the money safe, there was the added bonus of gaining some interest for parking your money there. The consequence of earning some interest is that it can be taxed as income by the government. In a TFSA, however, any money earned in the TFSA is not taxable by the Canadian government – ever.

How it works?

Most large Canadian banks as well discount brokerage firms offer a TFSA. Opening a TFSA is generally as simple as opening any other account at these institutions. In order to qualify for getting a TFSA however you have to meet the following criteria:

  1. You have to be a Canadian resident
  2. You have to have a Social Insurance Number
  3. You have to be 18 years of age or older

The government has set a limit on the amount of money you are able to contribute into your TFSA in any one year. In the first year of the program (2009) the amount was set at $5000 and every subsequent year this amount increases according to the inflation rate.

The good news is that you are able to carry forward any unused contribution room to future years so even though you might not have opened a TFSA in 2009, you have accrued the contribution room since that time. The CRA will provide the contribution room figure on your income tax statement (called the Notice of Assessment).

To help understand better how a TFSA works, let’s walk through an example. Suppose you had $1000 to save in the first year (2009) and you decided to put that $1000 into a TFSA. Your contribution limit for the year was $5000 but since you only used up $1000, you’re left with $4000 of extra room for that year. As of January 1st the following year your contribution room would increase by $5000 plus any unused contribution room from the prior years ($4000) bringing your grand total of contribution room to $9000. The exact amount of contribution actually is slightly more than $5000 each year because of inflation. Your personal amount can be found on your tax return or via Canada Revenue Agency’s “my Account” website [http://www.cra-arc.gc.ca/myaccount/] .

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