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It was introduced by [[Jim Flaherty]], [[Canada|Canadian]] federal [[Minister of Finance (Canada)|Minister of Finance]], in the [[2008 Canadian federal budget|2008 federal budget]]. It was a significant measure in the budget and came into effect on January 1, 2009.<ref>“Get ready for new Tax-Free Savings Account”, Oakville Today, 2008-06-19. Retrieved on 2008-06-20. </ref>
It was introduced by [[Jim Flaherty]], [[Canada|Canadian]] federal [[Minister of Finance (Canada)|Minister of Finance]], in the [[2008 Canadian federal budget|2008 federal budget]]. It was a significant measure in the budget and came into effect on January 1, 2009.<ref>“Get ready for new Tax-Free Savings Account”, Oakville Today, 2008-06-19. Retrieved on 2008-06-20. </ref>


This measure was supported by the [[C.D. Howe Institute]]: “This tax policy gem is very good news for Canadians, and Mr. Flaherty and his government deserve credit for a novel program”,<ref> “TFSA’s: the biggest thing since RRSP’s”, National Post, 2008-02-27. Retrieved on 2008-06-23. </ref>, the Canadian Federation of Independent Business<ref>“Budget: Report Card”, National Post, 2008-02-26. Retrieved on 2008-06-23.</ref>, Canadian Bankers Association<ref>“Federal Budget Prudent for Today’s Economic Conditions”, Canadian Bankers Association, 2008-02-26. Retrieved on 2008-06-23. </ref>, [[Bank of Montreal]] economist Doug Porter<ref>“Budget: Report Card”, National Post, 2008-02-26. Retrieved on 2008-06-23. </ref>, the Canadian Chamber of Commerce<ref>“2008 Budget”, The Canadian Chamber of Commerce, 2008-02-26. Retrieved on 2008-06-23.</ref>, and the Canadian Taxpayers Federation<ref>"A New Tax Savings Plan & Modest Spending Growth”, Canadian Taxpayers Association, 2008-02-26. Retrieved on 2008-06-23. </ref>.
This measure was well received by Canadians, with the [[C.D. Howe Institute]] saying, “This tax policy gem is very good news for Canadians, and Mr. Flaherty and his government deserve credit for a novel program.”<ref> “TFSA’s: the biggest thing since RRSP’s”, National Post, 2008-02-27. Retrieved on 2008-06-23. </ref> It also earned praise from the Canadian Federation of Independent Business<ref>“Budget: Report Card”, National Post, 2008-02-26. Retrieved on 2008-06-23.</ref>, Canadian Bankers Association<ref>“Federal Budget Prudent for Today’s Economic Conditions”, Canadian Bankers Association, 2008-02-26. Retrieved on 2008-06-23. </ref>, [[Bank of Montreal]] economist Doug Porter<ref>“Budget: Report Card”, National Post, 2008-02-26. Retrieved on 2008-06-23. </ref>, the Canadian Chamber of Commerce<ref>“2008 Budget”, The Canadian Chamber of Commerce, 2008-02-26. Retrieved on 2008-06-23.</ref>, Canadian Taxpayers Federation<ref>"A New Tax Savings Plan & Modest Spending Growth”, Canadian Taxpayers Association, 2008-02-26. Retrieved on 2008-06-23. </ref> among other organizations. It was also criticized for encouraging savings during [[Late-2000s financial crisis|a major financial crisis]] when spending is needed to improve the economy and that many Canadians were too indebted to start one.


==Benefits==
==Benefits==
The TFSA is an investment option for Canadian residents 18 years and older wanting to save for the future. The TFSA's flexible structure allows the holder to be able to withdraw money from the account at any time, free of taxes. The allocations into the account are non-deductible; however this represents a lucrative opportunity for individuals with left-over income to invest in a savings vehicle, without the pressure of time constraints. The account also alleviates the burden of the [[capital gains tax]]. The interest-income will be able to compound tax-free. In essence, the account-holder can withdraw any amount out of the account, free from capital gains and/or withdrawal taxes.
The TFSA is an investment option for Canadian residents 18 years and older wanting to save for the future. The TFSAs’ flexible structure allows the holder to be able to withdraw money from the account at any time, free of [[taxes]]. The allocations into the account are non-deductible; however this represents a lucrative opportunity for individuals with left-over [[income]] to invest in a savings vehicle, without the pressure of time constraints. The account also alleviates the burden of the [[capital gains tax]]. The interest-income will be able to compound tax-free. In essence, the account-holder can withdraw any amount out of the account, free from capital gains and/or withdrawal taxes.


One mechanism in the design of the TFSA is the carry-over aspect. Any unused space under the $5,000 cap can be carried forward to subsequent years, without any upward limit.<ref>“Tories Introduce Tax-Free Savings Account”, CTV, 2008-02-26. Retrieved on 2008-06-20. </ref> The TFSA also allows [[income splitting]] to an extent, because a higher-earning spouse can contribute to the TFSA of a lower-earning spouse.<ref>“Tax-Free Savings Account (TFSA)”, Canadian Capitalist, 2008-02-26. Retrieved on 2008-06-20. </ref>
One mechanism in the design of the TFSA is the carry-over aspect. Any unused space under the $5,000 cap can be carried forward to subsequent years, without any upward limit.<ref>“Tories Introduce Tax-Free Savings Account”, CTV, 2008-02-26. Retrieved on 2008-06-20. </ref> The TFSA also allows [[income splitting]] to an extent, because a higher-earning spouse can contribute to the TFSA of a lower-earning spouse.<ref>“Tax-Free Savings Account (TFSA)”, Canadian Capitalist, 2008-02-26. Retrieved on 2008-06-20. </ref>

Revision as of 16:05, 9 June 2011

The Tax-Free Savings Account (TFSA) is an account that provides tax benefits for saving in Canada. Contributions to a TFSA are not deductible for income tax purposes. Investment income, including capital gains, earned in a TFSA is not taxed, even when withdrawn.

History

It was introduced by Jim Flaherty, Canadian federal Minister of Finance, in the 2008 federal budget. It was a significant measure in the budget and came into effect on January 1, 2009.[1]

This measure was well received by Canadians, with the C.D. Howe Institute saying, “This tax policy gem is very good news for Canadians, and Mr. Flaherty and his government deserve credit for a novel program.”[2] It also earned praise from the Canadian Federation of Independent Business[3], Canadian Bankers Association[4], Bank of Montreal economist Doug Porter[5], the Canadian Chamber of Commerce[6], Canadian Taxpayers Federation[7] among other organizations. It was also criticized for encouraging savings during a major financial crisis when spending is needed to improve the economy and that many Canadians were too indebted to start one.

Benefits

The TFSA is an investment option for Canadian residents 18 years and older wanting to save for the future. The TFSAs’ flexible structure allows the holder to be able to withdraw money from the account at any time, free of taxes. The allocations into the account are non-deductible; however this represents a lucrative opportunity for individuals with left-over income to invest in a savings vehicle, without the pressure of time constraints. The account also alleviates the burden of the capital gains tax. The interest-income will be able to compound tax-free. In essence, the account-holder can withdraw any amount out of the account, free from capital gains and/or withdrawal taxes.

One mechanism in the design of the TFSA is the carry-over aspect. Any unused space under the $5,000 cap can be carried forward to subsequent years, without any upward limit.[8] The TFSA also allows income splitting to an extent, because a higher-earning spouse can contribute to the TFSA of a lower-earning spouse.[9]

The $5,000 annual contribution limit will be indexed to the Consumer Price Index (CPI), in $500 increments, in order to account for inflation.[10]

How TFSAs differ from RRSPs

In a sense the tax treatment of a TFSA is the opposite of a Registered Retirement Savings Plan (RRSP). For RRSPs, there is a tax deduction for contributions to a RRSP, and withdrawals of contributions and investment income are all taxable. In contrast, there is no tax deduction for contributions to TFSA, and there is no tax on withdrawals of investment income or contributions from the account. Up to $5,000 per year can be placed into a TFSA.[11] This money can then be withdrawn at any point of time, without penalty. Unlike RRSP’s, which must be withdrawn before the holder turns 71, the TFSA does not expire. The contribution room for funds withdrawn from a TFSA is reallocated in the tax year after the withdrawal, unlike an RRSP, where the contribution room is permanently reduced once a contribution is made.

The Canada Revenue Agency (CRA) describes the difference between a TFSA and an RRSP as follows: "An RRSP is primarily intended for retirement. The TFSA is like an RRSP for everything else in your life."

Eligible investments

A TFSA can hold any investments that are RRSP eligible, including: publicly traded shares on eligible exchanges, eligible shares of private corporations, certain debt obligations, installment receipts, money denominated in any currency, trust interests including mutual funds and real estate investment trusts, annuity contracts, warrants, rights and options, registered investments, royalty units, partnership units, and depository receipts.[12]

Overcontributions

On June 1, 2010, the Canada Revenue Agency (CRA) mailed about 72,000 overcontribution letters to TFSA holders, representing about 1.5% of all 4.7 million TFSA-holders. The letters and calculations were based on information CRA received from financial institutions.

As a result of this mailing, financial institutions received many calls from confused clients. The TFSA holders did not realize that withdrawals from the TFSA increase the available contribution room not in the current calendar year, but the next calendar year.

For example, if you contributed $5,000 to a TFSA in January 2009, withdrew it all in July, and then later recontributed the $5,000 in November 2009, this would put you in an overcontribution position because the $5,000 July withdrawal does not create further room until 2010. This rule has caused much confusion.

The CRA recommended taxpayers still send in their payment penalty with the TFSA return and a letter explaining the situation by June 30th, 2010. The CRA stated it would review this information on a case by case basis. If relief was granted, the CRA said they would return the payment. As of June 2010, the CRA has received about 10,000 responses to its letter from taxpayers.

TFSA holders can wait until they receive a Notice of Assessment, expected to be issued in August 2010, and then either file a formal Notice of Objection or apply for administrative relief by writing to the CRA. The risk of waiting, however, is that a late-filing penalty as well as interest may be charged by the CRA.

Similar accounts in other countries

The TFSA is similar to Roth IRAs in United States [13]. In the UK, similar tax advantages have been available in Individual Savings Accounts since 1999.[14]

See also

References

  1. ^ “Get ready for new Tax-Free Savings Account”, Oakville Today, 2008-06-19. Retrieved on 2008-06-20.
  2. ^ “TFSA’s: the biggest thing since RRSP’s”, National Post, 2008-02-27. Retrieved on 2008-06-23.
  3. ^ “Budget: Report Card”, National Post, 2008-02-26. Retrieved on 2008-06-23.
  4. ^ “Federal Budget Prudent for Today’s Economic Conditions”, Canadian Bankers Association, 2008-02-26. Retrieved on 2008-06-23.
  5. ^ “Budget: Report Card”, National Post, 2008-02-26. Retrieved on 2008-06-23.
  6. ^ “2008 Budget”, The Canadian Chamber of Commerce, 2008-02-26. Retrieved on 2008-06-23.
  7. ^ "A New Tax Savings Plan & Modest Spending Growth”, Canadian Taxpayers Association, 2008-02-26. Retrieved on 2008-06-23.
  8. ^ “Tories Introduce Tax-Free Savings Account”, CTV, 2008-02-26. Retrieved on 2008-06-20.
  9. ^ “Tax-Free Savings Account (TFSA)”, Canadian Capitalist, 2008-02-26. Retrieved on 2008-06-20.
  10. ^ “Tax Measures: Supplementary Information”, Department of Finance, 2008-02-26. Retrieved on 2008-06-20.
  11. ^ "How the 'TIFSA' can be your tax free nest egg". Financial Post. 2008-02-26. Retrieved 2009-02-17.
  12. ^ http://www.cra-arc.gc.ca/E/pub/tp/it320r3/it320r3-e.html
  13. ^ How the 'TIFSA' can be your tax free nest egg
  14. ^ "Cashing in on TFSAs" (PDF). Benefits Canada. May 2008. Retrieved 2009-02-17.
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