Tax-free investment income for lifetime savings needs

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Your Finances with Stephen Maltby

Tax-Free Savings Accounts (TFSAs) are a flexible, registered general-purpose savings vehicle that allows Canadians to earn tax-free investment income to more easily meet lifetime savings needs.

The Basics

Anyone who is at least 18 years old is permitted to open a TFSA. The only requirement is that the individual must have a social insurance number when the account is opened. There is no limit to the number of TFSAs you can set up.

That being said, the total amount you can contribute to your TFSA(s) is based on your TFSA contribution room. Since 2009, everyone who is at least 18 years old and a Canadian resident accumulates $5,000 of TFSA contribution room each year from 2009-2012 and $5,500 in 2013 (indexed annually, rounded to the nearest $500). This TFSA contribution room is cumulative and can be carried forward indefinitely to future years.

If you were 18 and have resided in Canada since at least 2009 and have never contributed to a TFSA, in 2013 you could contribute a total of $25,500, since you would have accumulated $5,000 of TFSA contribution room for each of 2009 to 2012, and $5,500 for 2013.

Perhaps the most interesting twist in these rules is that, unlike Registered Retirement Savings Plans (RRSPs), any amounts withdrawn from your TFSA in a particular year will be automatically added to your TFSA contribution room for the following year, allowing individuals who withdraw TFSA funds to re-contribute an equivalent amount. So when you withdraw, you may need to wait until a future year to re-contribute to avoid penalties. Withdrawals made to correct over-contributions are not added back into contribution room. .

The contribution and withdrawal rules also appear to have caused problems for some people who transferred their TFSA funds between financial institutions. Funds can be transferred directly from one TFSA plan of yours to another TFSA plan of yours without affecting TFSA contribution room. For a direct transfer, the proper form, must be completed and submitted to the receiving financial institution, which will then arrange for transfer of the plan balance directly from the other financial institution. Many individuals who used the withdrawal/contribution method instead of the direct transfer method (for example, to avoid paying a transfer fee or waiting the typical turnaround time to complete the transfer) have found that they inadvertently exceeded their TFSA contribution limits.

Over-contributions, even if made innocently, can yield significant penalties. The penalty for making a "non-deliberate" over-contribution is one per cent per month for each month the over-contribution remains in the TFSA. Deliberate over-contributions (where taxpayers clearly attempt to put in more than their limits to take advantage of tax-free income or growth) are also subject to a penalty of 100% of any income or gains resulting from the over-contribution.

Contributions "in kind" will result in a deemed disposition, with a capital gain being reportable and any capital loss denied, just like with in-kind RRSP contributions.

Unlike RRSPs, but similar to Registered Education Savings Plans (RESPs), contributions to a TFSA are made from after-tax funds (hence "tax pre-paid") and therefore will not be tax deductible from income. The big advantage, assuming you are not in an over-contribution position, is that any income and gains on investments held within a TFSA won’t be taxed either while inside the TFSA or upon ultimate withdrawal.

Tax Free Saving Accounts are important planning tools.They are a great way to start a savings plan,they provide for tax effective tax planning and are an excellent way to shelter non-registered savings from taxation.They are also flexible.The same type of investments you buy in your non-registered can be bought in a TSFA.

The TFSA can be an emergency fund that can be tax-effectively established since all interest income earned,mutual fund TFSA, will be tax-free.

This all-purpose fund can also be used for non-emergencies and accessed multiple times during one’s lifetime for various reasons, such as to buy a car, pay for a wedding, buy a home or in retirement be a source of regular income.


Stephen Maltby is an Investment Adviser and Chartered Accountant with CIBC Wood Gundy. He has been in the financial services industry for more then 30 years and has held various accounting, investment and management positions with several accounting and investment firms over the years.He is in addition to his Advisor role a First Vice-President and Executive Director Atlantic Canada, CIBC Wood Gundy.


Organizations: Registered Retirement Savings Plans, CIBC Wood Gundy, Registered Education Savings Plans

Geographic location: Canada

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