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A new type of savings account will be available for all Canadian residents age 18 or older.
Called a Tax-Free Savings Account (TFSA), this new savings vehicle will be available as of January 1, 2009.
TFSAs allow Canadians to save money on a tax-exempt basis for any financial goal: a long-term goal such as retirement or a house or a short-term goal such as a car or a vacation.
TFSA details at a glance
Start date: January 1, 2009.
Who's eligible: Canadian residents age 18 or older (Note that a Social Insurance Number must be provided to open and administer the account).
Contribution limit: $5,000 per year, beginning 2009 (the TFSA dollar limit will be indexed to inflation and rounded to the nearest $500 in later years). Unused contribution room can be carried forward to future years. Any amounts withdrawn will also be added to contribution room in the following year.
Over-contribution penalty: The Canada Revenue Agency will charge a penalty of 1% per month based on the actual monthly over-contribution amount.
Deductibility: Contributions to a TFSA cannot be deducted for income tax purposes.
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Tax on investment income: None. Investment income (including capital gains) earned in a TFSA is not subject to tax.
Tax on withdrawals: None. Investors can withdraw funds from a TFSA at any time for any purpose and will not be taxed or otherwise penalized.
Eligibility for federal income-tested benefits and credits: Income earned in a TFSA and withdrawals from a TFSA will not affect eligibility for benefits and credits such as the Canada Child Tax Benefit, Employment Insurance benefits, Guaranteed Income Supplement, Old Age Security benefits, Age Credit and Goods and Services Tax Credit.
Spousal TFSAs: Individuals can contribute to a spouse’s TFSA. Contributions made by an individual into a spouse’s TFSA are not subject to the income attribution rules (since income earned within the TFSA is not taxable). On death TFSA assets can be transferred to the surviving spouse or common-law partner without affecting the contribution room of the survivor.
Transfer rules: Individuals can transfer investments from an existing non-registered account into a TFSA, just as they can transfer investments from an existing non-registered account into a Registered Retirement Savings Plan (RRSP). The investments transferred are deemed to have been disposed at fair market value. This may trigger a capital gain which would be taxable and reported on an individual’s income tax return. If a capital loss is triggered, the loss may be denied under the superficial loss rules.
Tracking contribution limits: Each year, the government determines and advises individuals of their TFSA contribution limits for that tax year.
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TFSAs |
RRSPs |
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Withdrawals
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Not tax-deductible
Tax-free - withdrawals are added to contribution room effective the following year
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Tax-deductible
Taxed - withdrawals are final and are not added to contribution room
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| Earned income requirement for contribution room |
Contribution room is not based on earned income |
Contribution room is based on earned income |
| Age requirement for conversion/collapse |
There are no conversion requirements for TFSAs |
An RRSP must be converted to a Registered Retirement Income Fund (RRIF) or annuity at age 71 |
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Attribution rules
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Attribution rules do not apply. You can give money to your spouse/common-law partner or adult child (age 18+) for his/her TFSA, and income earned will not be attributed back to you |
Attribution rules may apply to withdrawals from a spousal RRSP under certain conditions |
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Eligible investments
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Mutual funds, stocks, bonds and all investments currently permitted in RRSPs |
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