Understand, and Take Full Advantage of the TFSA
The Canadian concept of earning tax free interest, and investment income was first introduced in the federal budget of 2008. The program appropriately named the Tax-Free Savings Account (TFSA) became law in 2009. Under the program, Canadian resident individuals (including foreign students, Workers, and Permanent Residents) who are eighteen or older with a valid SIN can set money aside on a tax-free basis throughout their lifetime. Neither the contributions to, nor the withdrawals from a TFSA have any tax consequence. Similarly administrative, interest on borrowed money, or any other fees in relation to TFSA also are not tax deductible.
The TFSA program is the only reliable and flexible way for Canadian taxpayers to save for their short, medium, and long term goals without being taxed. It is a reliable program because it is governed by federal statute and can be only administered by Trust companies, credit unions, insurance companies, and banks. It is also a flexible program because it allows transferring in and out of the program without any penalty or limitation. Details of the dos and don’ts of this program are as follows:
Who Qualifies to Open a TFSA in Ontario
Any Ontario resident individual who is 18 years of age or older and who has a valid Social Insurance Number (SIN) is eligible to open and contribute a TFSA. Residency condition prohibits non-residents of Canada from opening a TFSA. If a non-resident of Canada with a valid SIN opens and contribute to a TFSA, then any contributions made while a non-resident will be subject to a 1% tax for each month the contribution stays in the account. If you become a non-resident of Canada, or are considered being a non-resident for income tax purposes then you will be allowed to keep your TFSA and you will not be taxed in Canada on any earnings in the account or on withdrawals from it. However, no TFSA contribution room will accrue for any year throughout which you are a non-resident of Canada. Any withdrawals made during the period that you were a non-resident will be added back to your TFSA contribution room in the following year, but will only be available if you re-establish your Canadian residency status for tax purposes.
How much can you contribute to your TFSA
The annual TFSA contribution room is indexed to prevailing inflation rate and is rounded to the nearest $500.00. For 2019, the annual TFSA contribution limit is $6,000. The unfunded annual TFSA contributions accumulate to the maximum amount that one can contribute to a TFSA. The TFSA contribution room is made up of; Annual TFSA dollar limit, any unused TFSA contribution room from the previous year, and any withdrawals made from the TFSA in the previous year. At the end of 2019, the accumulated contribution room for an individual who has never contributed to his or her TFSA amounts to $63,500.
At any time in the year, over-contribute to a TFSA will be subject to a tax equal to 1% of the highest excess TFSA amount in the month, for each month that the excess amount remains in the account.
You can have more than one TFSA at any given time, but the total amount you contribute to all your TFSAs cannot be more than your available TFSA contribution room for that year.
Types of permitted investments
Types of investments that are permitted in a TFSA are the same as those permitted in a Registered Retirement Savings Plan (RRSP). These would include: cash, mutual funds, securities listed on a designated stock exchange, guaranteed investment certificates, bonds, and certain shares of small business corporation.
You can contribute foreign funds to a TFSA. However, such contributions will be converted to Canadian dollars (using the exchange rate on the date of the transaction), when the TFSA trustee reports the information to the CRA. The total amount of your contribution, in Canadian dollars, cannot exceed your TFSA contribution room. You can also make “in kind” contributions (for example, securities you hold in a non-registered account) to your TFSA, as long as the property is a qualified investment. Investments qualified for RRSP accounts are also qualified for TFSA accounts.
On the surface, the effectiveness of TFSA as a serious investment vehicle may not be apparent. However, the magic of full utilization of annual TFSA contributing room in achieving one’s financial goals cannot be overstated. If you are resident of Canada, live in Ontario, and are 18 years of age or older you are well advised to take full advantage of this tax-free vehicle for your investment opportunities. It must be noted that the type and mix of financial products you place in a TFSA is a function of a number things including your age, risk tolerance, and purpose of your financial goal. To learn about Self-Directed TFSAs and also fully appreciate how a TFSA can accelerate achieving you financial goals, please visit us at MasterAccountants.com
All content provided on this blog is for information purposes only. Master Accountants does not in any way whatsoever, guarantee, warrant, or otherwise make any representation as to the accuracy, completeness, or usefulness of any of the information contained in this blog regardless of how the reader obtained access to it. Master Accountants will not be held liable for any errors or omission in the information presented nor for any loss that may result from the application of this information. The reader is strongly advised to consult his or her professional accountant and NOT to rely on this information.