Tax-Free Savings Account (TFSA)

In the 2008 budget, the Federal government announced the introduction of the Tax–Free Savings Account (TFSA): a flexible investment account that allows you to earn investment income without paying taxes and gives you access to your money whenever you want it.

The Basics

Beginning in 2009, available to all residents of Canada 18 or over with no upper age limit. Maximum annual contribution limit is $5,000 (to be indexed in the future) with a life time carry forward of unused contribution room. Contribution room accumulates automatically even if unused for anyone achieving the age of 18 assuming they file an annual personal income tax return.
No tax deduction for contribution.
No tax on growth while in the plan or on withdrawal.
No attribution on contributions to another’s plan.

Additional Information

Each plan holder names a beneficiary. If a spouse is the beneficiary and the plan holder dies, all funds may be retained in the deceased spouse’s plan or merged with the surviving spouse’s plan. If beneficiary is anyone other than spouse, all income on funds after date of death is taxable as earned.
Plan may be used as collateral for loans.
Funds may be withdrawn for any reason.
Withdrawn funds create additional contribution room and may be replaced at any time beginning in the year following the withdrawal.
Plan may be maintained after becoming non-resident but no further contributions are allowed.
Interest paid on funds borrowed to contribute to the TFSA is not deductible, neither are brokerage or investment counsel fees on the plan.
Dealt with on separation or divorce as are RRSP’s.
1% tax per month on over-contributions or contributions made while a non-resident.

Top Uses and Strategies

Emergency (Rainy Day) reserve funds.
Those who have already maxed out their annual RRSP contributions.
Those in lower income levels whose RRSP contribution has lesser marginal tax relief.
Those saving for a specific objective such as a home or automobile.
Those in variable income cycles. Save in TFSA in low income years and withdraw to make RRSP contribution in high income years. (While still retaining the TFSA contribution room).
Those wishing to bridge early retirement years and take advantage of maximum deferrals in RRSP/RIF’s. (Use TFSA’s first and then RIF’s).
Those wishing to save for estate income taxes as an alternative to expensive insurance policies.
Parents wishing to assist adult children (possibly in addition to RESP savings accumulated before age 18).
Employers may wish to use group TFSA’s in conjunction (or in place of) group RRSP’s. These may be less expensive to administer. Employer contributions to employee TFSA’s will require withholding tax (as with all payroll) unlike RRSP contribution which are exempt from withholding tax requirements.

Integration of TFSA’s, RRSP’s and Non-Registered Accounts

The use of all three types of plans depends on the cash flow and funds available for investment for each family.
Emergency reserves are best kept in a TFSA given the ability to withdraw as necessary and repay.
Aspiring first time homeowners should save up to $20,000 each in their RRSP to take advantage of the Home Buyers Program (HBP).
Conversion to TFSA’s may be made from current non-registered accounts. However the same “in-kind” rules apply as with RRSP’s. Unrealized capital gains are triggered and taxable in year of transfer. However, unrealized capital losses are denied.
Generally those in the lower marginal tax brackets should first use TFSA’s while those in the highest should first use RRSP’s. If funds are still available for investments, non-registered plans should then be used.
Withdrawal from TFSA’s by seniors (over 64 years of age) will have no affect on income tested benefits such as OAS. GIS, age NRTC, etc.
Use of TFSA’s by those below 65 also has Nil affect on income tested benefits such as CTB, GST credits, etc.

If funds are not available to fund TFSA’s, RRSP’s and Non-Registered

First choice for all investment types:
Income	Type	Reason
Interest	TFSA	No tax on growth
Capital Gains	TFSA	No tax on growth
Capital Losses	RRSP	Fully reduce eventual tax on withdrawls
Foreign Income Taxed like Interest	TFSA	Otherwise taxed like interest No tax on growth
Non-Eligible Dividends	TFSA	No tax on growth
Eligible Dividends (up to maximum receivable with no tax to pay	Non-Registered	Dividend tax credit offsets tax and may reduce on other income
Eligible Dividends (over the maximum receivable with no tax to pay	TFSA	No tax on growth

TFSA Strategies – for those having sufficient funds to utilize TFSA’s, RRSP’s and Non-Registered accounts.

Due to the maximum annual contribution limit of $5,000 per plan, RRSP’s and Non-Registered accounts will remain the most significant portion of the investment portfolio (in the short term). Go to nexgenfinancial.ca to find strategies to improve tax-efficient accumulations in a non-registered portfolio.

For conservative investors, all fixed income should be maintained in TFSA’s and RRSP’s with equities in Non-Registered accounts.

To the extent stock is held in a TFSA, Long-term “holds” are best as greater time periods make it less likely unrealized losses will be present.

Aggressive equity investments are best held in Non-Registered accounts as losses are offset against gains.

Specific investment goals such as first principal residences are best met by saving funds in RRSP to the maximum RHOSP/HBP.

Conclusion

All clients over the age of 17 should have a TFSA account as, regardless of their personal situation, they will benefit in some manner from having the account.

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