The Tax-Free Savings Account (TFSA) is a simple investment vehicle that allows Canadians to pay no tax on both the interest earned and any withdrawals from the account. These accounts can be accessed at any time and there are no restrictions on the use of funds withdrawn from a TFSA.
TFSA’s are available through Canadian banks, credit unions, investment and insurance companies.
TFSA’s were introduced in the 2008 Federal budget and became available as of January 1, 2009 to all Canadians over the age of 18 regardless of income. The current annual contribution limit to a TFSA is $5,500.
Annual contribution limits are carried over indefinitely, allowing Canadians to contribute up to $5,500 per year retroactive to 2009. Any deposits to a TFSA that exceed the available contribution room will be taxed at the applicable rate.
Funds that are withdrawn from a TFSA can be replaced through either intermittent deposits or one lump sum starting in the calendar year after the initial withdrawal.
How TFSA’s Compare To Registered Retirement Savings Plans
While both a TFSA and a Registered Retirement Savings Plan (RRSP) are federally-registered investment vehicles that provide Canadians with tax advantages, there are some significant differences between the two plans including:
- Contributions to an RRSP are tax-deductible and serve to reduce taxable income during the year the contribution is made, where TFSA deposits do not affect taxable income.
- The annual TFSA contribution limit is fixed at $5,500. In comparison, the annual RRSP contribution limits are variable based on the individual’s income.
- Withdrawals from a TFSA are nontaxable; RRSP withdrawals are taxed as income.
- Both TFSA’s and RRSP’s can hold a variety of investments, including savings accounts, stocks, bonds and Guaranteed Investment Certificates (GICs).
Reasons For Opening A TFSA
For many Canadians, a TFSA provides a tax-sheltered alternative to the traditional savings account that can be used to hold emergency funds, save for a vacation or use towards the purchase of a home. A TFSA can also be used for income-splitting between spouses with the higher-income earner gifting the TFSA deposit amount to their spouse.