TFSA
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Tax-Free Savings Account (TFSA)

 

About TFSA

Since January 1, 2009, Canadians have a new way to save money with the introduction of the Tax-Free Savings Account (TFSA). A new registered savings account introduced by the Federal Government in the 2008 Budget, the TFSA helps Canadians from all walks of life save for their financial goals. The plan offers great flexibility; funds grow tax free, can be withdrawn at any time on a tax-free basis, and can be used for any purpose.

How the TFSA works


  • Canadian residents age 18 and over can save up to $5,000 a year in a TFSA

  • Contributions are not tax deductible, but investment returns (capital gains, interest and dividends) earned in a TFSA are not taxed, even when withdrawn

  • Withdrawals are tax free and funds can be used for any purpose

  • Unused contribution room can be carried forward to future years. As well, any amount withdrawn from a TFSA can be re-contributed in a future year without requiring new contribution room

  • Neither income earned in a TFSA nor withdrawals will affect eligibility for federal tax credits or income-tested benefits such as the Canada Child Tax Benefit, Old Age Security (OAS) or the Guaranteed Income Supplement (GIS)

  • Investments eligible for an RRSP can generally be held in a TFSA

TFSA chart

Is it better to contribute to a TFSA or an RRSP?

While the two savings plans have different features and benefits, they are designed to complement each other. As a Government of Canada brochure states, while an RRSP is primarily intended for retirement, "The TFSA is like an RRSP for everything else in your life."

Generally speaking, whether it is better to contribute to a TFSA or an RRSP depends on two variables - your tax rate when you contribute funds and your tax rate when you withdraw funds. If you expect to be in a lower tax bracket when funds are withdrawn, an RRSP is probably a better investment. If you expect to be in a higher tax bracket when money is withdrawn, a TFSA may be the better choice. However, each individual situation is unique and other factors may come into play. Talk to your financial advisor about creating a strategy that will work for you.

Who does the TFSA benefit?


  • Young people just starting out: TFSAs stimulate more savings when starting at a younger age

  • Seniors: provides retired people with a means to save on a tax-free basis; neither withdrawals nor income earned in a TFSA will trigger clawbacks of Old Age Security benefits or the Guaranteed Income Supplement

  • High income earners: taxpayers who have already made the maximum contribution to their RRSP have another tax-effective savings vehicle

  • Lower income earners: taxpayers in a lower tax bracket may prefer to forgo the modest tax deduction of an RRSP in exchange for the tax-free growth and withdrawals of a TFSA

  • Anyone saving for a large ticket item: TFSAs can be used to fund a car purchase, vacation or down payment for a house

In other words, just about everyone.

Talk to your financial advisor about how the Tax-Free Savings Account (TFSA) may fit into your financial plan.