A tax-free savings account (TFSA) is an account in which contributions, interest earned, dividends received, and capital gains from the sale of investments are not taxed. Contributions and any income earned inside the TFSA account can generally be withdrawn tax-free.

A TFSA account can hold cash, mutual funds, securities, and bonds. Administrative or other fees in relation to TFSA including any interest on money borrowed to contribute to a TFSA are not tax deductible.

Key Facts

The Tax-Free Savings Account (TFSA) program began in 2009 as a way for individuals who are 18 and older and who have a valid social insurance number and residents of Canada to set aside tax-free throughout their lifetime. Contribution limits were $5,000 annually from 2009 to 2012, contribution limit was increased to $5,500 for the years from 2013 to 2018 excluding 2015 during which the limit was $10,000. In 2019 the limit was increased to $6,000, which is the same for 2020.

Contributions to a TFSA are not tax deductible like RRSP, but unlike RRSP amounts contributions taken out of the account are not taxable and will not be added to your taxable income.

Unused contribution rooms are carried forward indefinitely. Income earned by the investments in a TFSA account does not impact contribution room for the current or future years.

Income earned in a TFSA or amounts withdrawn from a TFSA will not affect your eligibility for other government programs such as Old Age Security (OAS), the Guarantied Income Supplement (GIS), or Employment Insurance (EI). It will not also affect your eligibility for federal credits, such as the Canada Child Benefit (CCB), the Canada Workers Benefit (CWB), the Goods and Services Tax (GST/HST) credit, or the age amount.

TFSA Account

Any individual who is 18 years of age or older with a valid social insurance number (SIN) and is a resident of Canada is eligible to open a TFSA. Your total contributions should not exceed your allowable contribution room for the year in which the account is opened. You can have more than one TFSA account at any given time so long as your total contributions do not go over your contribution limit. You can open a TFSA account with any financial institution, credit union, or insurance company.

Investments inside a TFSA can be either managed by the financial institution or self-directed should you prefer to build and manage your own investment portfolio by buying and selling different types of investments.

Types of Permitted Investments

Generally, the types of investments that are permitted in a TFSA are the same as those permitted in an RRSP, these would include:

· Cash

· Mutual Funds

· Securities listed on a designated stock exchange

· Guaranteed Investment Certificate (GIC)

· Certain shares of a small business corporation

Foreign funds

You can contribute in foreign funds to a TFSA, foreign funds amount will be converted to Canadian dollars by the financial institution using the rate of exchange on the date of transaction when reported to CRA. The converted amount in CDN$ should not exceed your TFSA contribution room. You need to keep in mind that dividend income paid into a TFSA account in a foreign country could be subject to foreign withholding tax.

Transfers from other investments

You make contributions to your TFSA account through transferring qualified investment such as securities to your TFSA. Such transfer will be considered as though you have disposed your securities at Fair Market Value (FMV), and capital gains calculated on the difference between FMV and original cost will be subject to a capital gain tax. If on the other hand a capital loss is recognized, you will not be able to claim such a loss on your tax return.

You can also transfer an investment from your RRSP to your TFSA, amount transferred will be considered as withdrawn at FMV and that amount will be reported as an RRSP withdrawal on your income tax return for that year.

TFSA Withdrawals

You can withdraw amounts from your TFSA account at any time without any tax obligations, however, you may be restricted depending on the kind of your investment and if the investment is locked-in for a period of time. Withdrawn amounts will be added to your contribution room at the beginning of the following year. Your contribution limit in the year of withdrawal will be limited to your contribution room during that year, therefore you may not be able to replace the full amount withdrawn in the same year.

Special considerations

· Over contribution: any contribution made to a TFSA above the maximum allowable contribution room will be considered an over-contribution. CRA will charge a penalty of 1% per month on the over contribution amount until it is withdrawn

· Non-resident contribution: any contribution made to a TFSA while you are a non-resident of Canada for tax purposes, you will be subject to a tax of 1% per month on these contributions until withdrawn from the account and are designated as a withdrawal of non-resident contributions. The tax will stop to be calculated if you become a resident of Canada again.

· Unlike an RRSP contribution, you can continue to contribute to a TFSA account even if you are over 71 years of age, also, you will not be required to convert your TFSA into a Retirement Income Fund (RIF) as required under RRSP

· While an RRSP is considered a savings plan for your retirement, a TFSA can be used to save (tax free) for anything, be it to save for a down payment for a home, or for retirement!

Please note that the above information is intended as a general source of information and should not be considered as specific source of tax, legal or financial advice. Tax rules and regulations are subject to change at any time, and we at MMS Accounting & Bookkeeping will help you navigate and fully benefit from any tax savings available to you. Should you need help finding which investment method is best suited for you, you may contact us for further details, you should also consult with your financial advisor.

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For more information, please visit our website www.mmsaccounting.ca or schedule a consultation call by clicking here.

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