TAX FREE SAVINGS ACCOUNTS (TFSA)

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By: Admin

What Are Tax-Free Savings Accounts (TFSA)?

TFSAs are available for Canadian residents 18 years of age or older. In a TFSA:

  • All investment income is tax-free,
  • Contributions are not tax deductible,
  • Withdrawals are not taxed,
  • Capital losses are not tax-deductible, and
  • Dividends will not be eligible for the dividend tax-credit.

How Much Can I Contribute?

In a TFSA, contributions are not restricted by a deadline, as the unused contribution is carried forward into the next year. Contribution room is established at the beginning of each tax year.

If you have $5,000 in contribution room, and deposit $5,000 into your TFSA, then you won’t be able to make additional contributions in the same year, even if withdrawals are made. Withdrawals will increase your contribution room, but not until the next tax year.

Excess contributions result in 1% per month payable tax.

Check your CRA account for your limits

Withdrawals and Transfers

Withdrawals will create further contribution room equal to the amount withdrawn, for contributions in future years. Withdrawing does not reduce the total amount of contributions made in the year.

You can transfer the amount from one TFSA into another of your TFSA without tax consequences. Transfers between your TFSAs and those made upon the breakdown of a marriage or partnership are considered as qualifying transfers.

TFSA Investments

There are three types of TFSA Investments: qualified, non-qualified, and prohibited. Taxes are applied to non-qualified or prohibited investments held in a TFSA.

  • Qualified investments are permitted within a TFSA. These include all RRSP investments.
  • Non-qualified investments are not permitted to be held in a TFSA. These can include land and general partnership units.
  • Prohibited investments are also not permitted within a TFSA and are identified under the Income Tax Act. These include property that is a debt of the TFSA holder, and shares, debt or interest in a partnership, corporation or trust.

Death of the TFSA Holder

A TFSA holder can nominate a spouse or common-law partner as the “successor holder” in the contract. The successor holder becomes the new holder on the death of the holder. This keeps the tax exempt status of the TFSA, while the contribution room stays unaffected.

If no successor holder has been nominated, the proceeds of the TFSA account become part of the deceased’s estate.

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