Tax Free Savings Accounts (TFSA) Q&A

The TFSA was first introduced in 2009 and there is still a lot of confusion regarding the benefits of investing in this tax efficient vehicle.   Here are some common questions;

What is a TFSA?

The TFSA is a flexible, registered general-purpose account that allows Canadians to earn tax-free investment income.

Who can invest in a TFSA?

In order to invest in a TFSA an individual must be at least 18 years old, a Canadian resident taxpayer and have a valid social insurance number.

How much can I contribute to a TFSA?

The annual allowable investable amount started at $5000 per year in 2009; in 2013 the amount was increased to $5500 for inflation.  If you have not contributed to a TFSA, your allowable amount will continue to accumulate provided you remain a Canadian resident and are over the age of 18. Currently to total allowable contribution limit is $31,000. 

How much can be redeemed from a TFSA?

You can redeem the entire account at any time without paying tax on the investment income you have earned.

Are contributions tax-deductible?

No.

Do withdrawals have an impact on my contribution room?

Yes.  If a withdrawal is made from a TFSA during the year, the amount withdrawn is added back to your TFSA contribution room the following year, and can be re-contributed in any subsequent year.

What happens if I over contribute?

Any over contribution amounts are subject to a 1% penalty tax per month.

Can I name a beneficiary or successor account holder on my TFSA?

Yes, beneficiary and successor accountholder designations can be made directly on the TFSA plan, unless you are a resident of Quebec.

If I borrow to invest in a TFSA is the interest expense tax-deductible?

No.

Can I use my TFSA as collateral for a loan?

Yes, this is specifically authorized and will have no negative tax consequences.

Can I hold a TFSA in joint ownership with my spouse or adult children?

No.

Can I open a TFSA for my minor children?

No.

What happens to my TFSA if I die?

The full account value becomes an asset in your estate.  While no tax is incurred on passing into the estate, any income earned after death will become taxable.  However, if there is a surviving spouse who is your successor accountholder/beneficiary that spouse may maintain that account as a TFSA, without affecting their contribution room on their own TFSA.

Should I contribute to my TFSA or my RRSP?

In most cases, if you are earning over $30,000 in income, need some tax relief and don’t need the money for a specific purpose, I would suggest investing your extra cash into an RRSP.  If you are saving for something specific like a car or vacation; the TFSA would be a better option.  In addition, for those that have maxed out their RRSPs and are continuing to save the TFSA is an excellent investment vehicle.  The money can still be used for a specific purpose, emergency fund or additional retirement savings. 

Hope this helps, if you have any other question don’t hesitate to contact me.

Have a great weekend,

Tracey

 

 

 

 

 

 

 

 

 

 

 

 

Source: Invesco Canada Ltd.