The Tax Free Savings Account (TFSA)

What it is it?

This is a new type of savings account announced by the federal government.

Starting January 2009, Canadian residents at least 18 years of age and having a Canadian Social Insurance Number (SIN) can open a TFSA account and invest a maximum of 5000 dollars a year.

The TFSA can be of any of the following types of investmens:

• In Cash

• Publicly traded securities and stocks

• Government and corporate bonds

• Guaranteed Investment Certificates (GICs)

As of next year, the maximum limit will be adjusted to inflation and rounded to the nearest 500 dollars.

The income derived (such as interest, dividends and capital gains) from the account will not be taxed. But contributions to the account will not be tax deductible.

Income from this account will not affect eligibility for federal benefits and credits such as Canada Child Tax Benefit, Old Age Security or the Guaranteed Income Supplement.

Withdrawals from the account will not be taxed. Furthermore, if one withdraws, for example, 2,000 dollars this year, then next year the maximum contribution amount will go up by 2,000 dollars.

And if you had invested only 3,000 dollars this year, then the maximum allowed contribution for next year would increase by 2,000 dollars.

If the account holder becomes a non-resident for tax purposes after contributing to the TFSA, he/she can retain the account but will be taxed for contributions while retaining that status.

There is a possibility for the account holder to transfer the TFSA assets to a spouse or common-law partner upon death. But income derived from the account, which ceases to be a TFSA upon the death of the account holder, after the death will be taxable.