What You Should Know About The Canadian Tax Free Savings Account (TFSA)

tfsaShould individuals have a tax-free savings account?

Yes. They truly are the best thing since sliced bread.

TFSAs are the government giving us the capability to earn money tax-free. If you have any investments that are not stuck in RRSPs or are not in a holding company, they should be in a tax-free savings account.

If you can pull money out of a corporation at a tax preferential rate and then put money into your tax-free savings account, you should be doing it. You cannot borrow money and put it in your tax-free savings account and deduct the interest.

When we’re talking about a tax-free savings account, we’re talking about excess funds or funds that are available for investing or funds that are already invested in something that is not already restricted, i.e. RRSPs or a corporation.

Who Should Open A TFSA?

Just about everybody should have a tax-free savings account because it’s the right way to invest. With the government allowing us to contribute $5,500 per year as of January 1, 2013, we don’t know when (or if) that is going to stop but everybody, in theory, should be maxing out their tax-free savings accounts.

Tax-free savings accounts can invest in just about everything an RRSP can invest in.

A few options for investing with a TFSA are:

  • Cash
  • Securities on a Stock Market
  • GICs and bonds
  • Certain small business shares

TFSAs are very flexible but they have to run through the exact same process as an RRSP. There is a trustee that is responsible for the tax-free savings account and most people use self-administered now, which is great.

The contributions to your TFSA are not themselves tax deductible but when you consider the availability of the money sitting there and not needing to pay taxes on withdrawals (as opposed to an RRSP), it becomes an extremely valuable savings tool. Anyone who has dipped into their RRSP early knows how much the taxes can bite back at the end of the year.

Anything you earn using your TFSA is not subject to taxes, whether it’s capital gains, income gains, dividend income – it doesn’t matter, it’s all tax-free. Everything you earn within an RRSP is taxable income.

Like all Kelowna accountants, I’m always asked how one can eliminate taxes. Before the TFSA, that wasn’t possible. Now that’s what I call a tax break!

6 Responses to What You Should Know About The Canadian Tax Free Savings Account (TFSA)

  • Thanks for the quick and easy read. In my work (mortgage brokering) I find that many first time buyers are pointed towards RRSP’s vs. TFSA’s in order to take advantage of the federal program that allows them to ‘borrow’ (tax free) from their RRSPs for a down payment on a home. What are your thoughts? Are they better off to simply use a TFSA and then withdraw the funds later? Does it depend on their (or their business) income?

    • Ken Davidson says:

      Depends on the individual circumstance, but yes in general I think with TFSA’s now in place with substantial $$ available they can use these funds to withdrawal and purchase the home. The reason why I might suggest an RRSP contribution and then withdrawal for home purchasers would be that depending on the tax rate they are paying personally they may actually have a few more dollars. The other “advantage” of RRSP is the requirement to payback while with a TFSA they may never pay themselves back – forced saving program.

  • Brent says:

    Is it possible to roll money from a RRSP into a TFSA without any tax ramifications?

  • David Laplante says:

    How does I know, from year to year, how much I can put back in my tfsa after I’ve talen some of the money out to invest elswhere? I know that you jave to wait until the next year to put the withdrawn money plus that year’s allowance. And, if I withdraw money on ,say, december 31th, does that mean I can re-deposit it on january 1st? Is THAT what is considered “next year”?

    • Ken Davidson says:

      TFSA – more complicated than anyone thought possible. When you receive your NOA from CRA it lets you know how much room you have in your TFSA – if you do not have this you can contact CRA and they will let you know.

      When you take out funds from your TFSA in one year you cannot replace it until the next year – the reset date is December 31st.

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