May 22, 2015
The Tax-Free Savings Account (TFSA) is a flexible, registered, general-purpose savings vehicle that allows Canadians to earn tax-free investment income to more easily meet lifetime savings needs. The TFSA complements existing registered savings plans like the Registered Retirement Savings Plans (RRSP) and the Registered Education Savings Plans (RESP).
How the Tax-Free Savings Account Works
An individual will not accumulate TFSA contribution room for any year during which the individual is a non-resident of Canada throughout the entire year.
The TFSA dollar limit is not prorated in the year an individual:
TFSA contribution room
Your TFSA contribution room is the maximum amount that you can contribute to your TFSA.
Starting in 2009, your TFSA contribution room accumulates every year, if at any time in the calendar year you are 18 years of age or older, have a valid SIN and are a resident of Canada.
You will accumulate TFSA contribution room for each year even if you do not file an income tax and benefit return or open a TFSA.
The annual TFSA dollar limit for the years 2009, 2010, 2011, and 2012 was $5,000.
The annual TFSA dollar limit for the years 2013 and 2014 is $5,500.
The annual TFSA dollar limit for the years 2015 and beyond is $10,000.
Investment income earned by, and changes in the value of your TFSA investments will not affect your TFSA contribution room for the current or future years.
TFSAs can hold the same investments as RRSPs, such as mutual funds, stocks, bonds and GICs.
Types of permitted investments
Generally, the types of investments that are permitted in a TFSA are the same as those permitted in a registered retirement savings plan (RRSP). This would include:
As with RRSPs, those who borrow to fund TFSAs will not be able to deduct the interest for tax purposes.
TFSA will be another effective way for couples to split income for tax purposes. The so-called "attribution rules" do not apply to income earned in a TFSA.
Impact on your government benefits and credits
Your federal income tested benefits and credits such as: old age security (OAS) benefits, the guaranteed income supplement (GIS), or employment insurance (EI) benefits will not be reduced as a result of the income you earn in your TFSA or the amount you withdraw from your TFSA.
The income earned in the account or amounts withdrawn from a TFSA will also not affect your eligibility for federal credits, such as the Canada child tax benefit (CCTB), the working income tax benefit (WITB), the goods and services tax/harmonized sales tax credit (GST/HST), or the age amount.
You can withdraw money from the TFSA at any time, for any reason, with no tax consequences, and without affecting your eligibility for federal income-tested benefits and credits.
TFSA Penatly for Over Contributions
The tax of 1% per month will continue to apply for each month that the excess amount remains in the TFSA. It will continue to apply until whichever of the following happens first:
To conclude, the TFSA is a great addition to keeping your own wealth yours and should be part of your overall savings and retirement strategy, To all the critizism from the media on the value of this long term to the government revenues, remember this raises capital and rewards those successful taxpayers which is how things work in the real world. Save and prosper.
Notice to Reader - Warning and Disclaimer
This monthly update was prepared on May 22, 2015.
When considering any of ideas from this article, please contact the writer directly before acting on them. This will ensure that any information has been updated.
Without contacting the writer before implementing any of these items you will bear all the responsibility for any tax assessments and or business issues that may arise from this information.
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