Tax Free Savings Account (TFSA): What you need to know?
Tax-Free Savings Accounts were launched in January 2009 and have been growing in popularity ever since. Before going into the benefits of TFSA I believe it is important to define TFSA as per the CRA website:
“The new 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”
However, one thing that is different than RRSP is that the money provided towards TFSA accounts is not tax-deductible. Thus you deposit after-tax funds into the account and are then eligible to take out the earned income from the account without paying tax on the gains. Here are some other interesting facts and tax tips about TFSA’s:
1) Income earned on TFSA are forever tax free- All income earned in TFSA accounts are tax free and do not affect income support programs based on earnings levels.
2) No Investment Restrictions- The investments allowed in TFSA include almost every type of investment vehicle from GIC’s to mortgages. The main rule is that the investment be arm’s length from you and you are also eligible to make investments in-kind such as transferring mutual funds and shares that you already own into your TFSA.
3) Beware of Over-Contributing- Since the program began, an individual may contribute up to $5,000 per year towards their TFSA. You can carry forward any unused amount to the next year. However, we caution readers that you cannot deposit money in January and take it out in June and re-deposit in July. The re-deposit is considered a double payment and is subject to hefty tax penalty.
4) No age limit to TFSA- Unlike RRSPs which have an age limit of 71, you can deposit money into TFSA for life and enjoy the benefit of Tax Free Income.
5) TFSA are only eligible for Canadian Residents- If you become a non-resident you have to stop contributing until you become a Canadian residence once again.
6) Increase Contribution Room for 2013 onwards- From January 2013 the contribution room will increase by $500 per year to $5,500. This is great news for all Canadians as it gives us an additional tax break.
SRJ Chartered Accountants Professional Corporation are Chartered Accountants in Toronto & Mississauga who specialize in helping individuals and corporations reduce taxes and tax planning. If you want to learn more about how we ensure you pay less tax and additional tax tips then contact us at firstname.lastname@example.org or 416-898-4235.