Six years after being introduced to the Tax Free Savings Account (TFSA), some Canadians are still confused about the rules surrounding this effective tax shelter.
Contributions: As of January 1, 2013, Canadian residents at least 18 years old can contribute up to $5,500 per year. From 2009 to 2012 the contribution limit was only $5,000 per year. Unused contribution room from eligible prior years can be carried forward to future years. Contributions are not tax deductible.
Taxes: Income and capital gains earned inside the TFSA are tax free. Neither income earned in the TFSA nor withdrawals affect eligibility for income-tested benefits including Old Age Security, Guaranteed Income Supplement, and the Canada Child Tax Benefit.
Withdrawals: Withdrawals from the TFSA are tax free. Any withdrawals made from a TFSA can be re-contributed in the following year. For example, a TFSA withdrawal made in 2014 can be re-contributed in 2015. TFSA assets can generally be transferred to a spouse or common-law partner upon death.
Before deciding how much to contribute to a TFSA, Canadians should first clearly understand their financial profile and goals. Factors such as your expected and current personal tax rate, your need for liquidity, the use of financial leverage, and need for creditor protection are all important considerations.
If you’re deciding on a TFSA or RSP contribution this year please be in touch for a complimentary chat at email@example.com or 416 369 3024.
Ben Kizemchuk is a Portfolio Manager & Investment Advisor with Altus Securities Inc. in Toronto. He offers financial planning and investment management for high net worth Canadian investors. Ben focuses on high quality investments, the Growth and Income Portfolios, low risk investing, and reducing tax.