A recent article in the Globe and Mail stated that 62% of Canadians had yet to open a Tax-free Savings Account (“TFSA”) by the end of 2013. I want to discuss this because a TFSA can be an important part of one’s investment strategy and is clearly being underutilized.
The benefit of a TFSA isn’t in the form of a tax deductible contribution, like the RRSP, but the tax free earnings on the investment funds. As of 2015 Canadian residents, who have not contributed to a TFSA, can contribute up to $41,000. As a result of the recent election the 2016 annual maximum is anticipated to drop to $5,500, a reduction from the 2015 maximum of $10,000. If you contribute less the remainder carries over to next year, to be added to the next year’s annual maximum. Income and capital gains earned in a TFSA are tax free and the increase in the value of your investment does not affect your contribution room. You can withdraw the funds at any time without attracting tax.
Also, anything you withdraw from the account is added to your contribution room in the next year. This is important; you can re-contribute the withdrawal in the subsequent year without affecting your contribution room. Re-contributing in the same year however, could result in over contributions which would be subject to a penalty. If you lose money on an investment and subsequently withdraw it, you don’t get to add back the total of your initial investment; you add back the actual amount you withdrew
Benefits and tips to consider:
– Gift or loan funds to a spouse, common-law partner or child over 18, so they can make use of their own room, income earned is not attributed to the giver.
– Designate your spouse or common-law partner as the successor holder and the plan will continue to accrue tax free without affecting their contribution room.
– Consider holding in the TFSA investments that give rise to foreign dividends, that don’t benefit from dividend tax credits.
– Income earned or withdrawals don’t affect eligibility for federally income-tested benefits such as OAS, GIS, GST, Child Tax Benefit.
– If you do contribute and haven’t kept track of your balance, you or your accountant can view your TFSA transaction summary on CRA’s website under My Account or Represent a Client.
For more information on TFSA’s please contact your CPA or
Dana Stevenson CPA, CA
Specialties: Notice to Reader, Review and Audited Financial Statement preparation. Corporate Income Tax, Not-for Profit and Charity returns. A senior accountant on all audit engagements and proficient in all aspects of an audit including reviewing, testing and recommending internal controls.