Financial Planning, Investment Counselling, Tax and Accounting

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TFSA

Tax-free Savings Account now available!

No doubt you’ve heard about the benefits of the new Tax-free Savings Account (TFSA), a new registered savings account introduced by the Government of Canada. Starting in 2009, Canadian residents age 18 and over can invest up to $5,000 a year in a TFSA. Although contributions are not tax-deductible, investment income (capital gains, dividends and/or interest) earned in the plan are not taxable, even when withdrawn. As well, investors can withdraw money from their TFSA at anytime, tax free, and the funds can be used for any purpose and deposited again at a future date.

With such flexibility, we expect the TFSA to be used for a variety of reasons such as saving for a trip or holding your emergency fund. Here are a few more ideas:

RRSP vs. TFSA

Is it better to contribute to a TFSA or an RRSP?

While the two savings plans have different features and benefits, they are designed to complement each other. Generally speaking, the decision to contribute to a TFSA or an RRSP depends on two variables - your marginal tax rate when you contribute funds and your marginal tax rate when you withdraw funds. If you expect to be in a lower tax bracket when funds are withdrawn, an RRSP is probably a better investment. If you expect to be in a higher tax bracket when money is withdrawn, a TFSA may be the better choice. However, each individual situation is unique and other factors may come into play.

Non-registered savings

The TFSA is an excellent complement to an RRSP. Once you have maximized your RRSP contributions, you can use a TFSA to shelter additional investments from tax. In addition to your RRSP contribution limit, you may invest $5,000 a year in a TFSA and shelter income and capital earned on this amount. An easy way to do this is to take the tax refund generated from your RRSP and contribute ($5,000 max) to your TFSA or transfer existing non-registered investments. Though in the latter case, you may be subject to capital gains or losses.

Complement RRIF/LIF

Income Plan holders can also continue to shelter after-tax RRIF/LIF income. There is no age restriction on contributing to a TFSA (unlike RRSPs, you can continue to contribute to a TFSA past the age of 71). If you don’t require your entire minimum withdrawal, you can deposit up to $5,000 a year from your RRIF/LIF income to a TFSA and shelter the income/growth of those funds from future income tax.

Supplement RESP savings

If you are saving more than the RESP matching grant limit, a TFSA can be used to save for your child’s education.

A TFSA and an RESP are similar in that neither will result in a tax deduction for contributions. A key difference is that withdrawals from a TFSA are tax free, while grant and growth withdrawals from an RESP are taxed (in the hands of the student). For many people it makes sense to contribute $2,500 to an RESP in order to obtain the grant of $500 per year, and then contribute up to $5,000 to a TFSA.

Would you like to open an account now?

Remember, you cannot make a contribution to a TFSA until January 2009. However we can prepare the paperwork now to open an account with your existing custodian. To do so, please contact us a 613-596-3353 or email This email address is being protected from spambots. You need JavaScript enabled to view it.