Dateline: 02/27/08
To provide incentives for Canadians to save, the federal government has introduced a Tax-Free Savings Account (TFSA) which will reduce the taxes Canadians have to pay on investment income. The Tax-Free Savings Account starts in 2009 and is a registered flexible general-purpose account.
Canadians will be able to put $5000 a year into a Tax-Free Savings Account, and be able to carry any unused contribution room forward to future years. The contributions aren't deductible on income tax, but any income earned in the account is tax free, including capital gains. Withdrawals can be used for any purpose, and create contribution room for future savings.
The Department of Finance estimates that an individual contributing $200 a month to a TFSA for 20 years would accumulate about $11,000 more in savings than if the investment were made in a taxable savings account.
Here are the details of the Tax-Free Savings Account:
- begins in 2009
- Canadians 18 years and older are eligible
- Canadians can contribute up to $5000 a year to a TFSA. The $5,000 annual contribution limit will be indexed to inflation in $500 increments.
- unused contribution room is carried forward to future years
- unlike an RRSP, contributions to a Tax-Free Savings Account are not decuctible from income tax
- capital gains and other investment income earned in a TFSA are not taxed
- income earned in a TFSA does not affect eligibility for federal income-tested benefits and credits
- investments which qualify for a TFSA include all arm’s-length Registered Retirement Savings Plan (RRSP) qualified investments
- withdrawals from a Tax-Free Savings Account can be used for any purpose
- withdrawals from a Tax-Free Savings Account are tax free
- withdrawals do not affect eligibility for federal income-tested benefits and credits
- withdrawals create contribution room for future savings
- contributions to a spouse's or common-law partner's TFSA are allowed. TFSA assets are transferable to TFSA of spouse or common-law partner at death.
