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What are TFSAs?

October 15, 2019

Tax Question:

What are Tax-Free Savings Accounts (TFSAs)?

Facts:

A TFSA is a registered account that was introduced by the federal government in the 2008 budget. It is a flexible investment account with contribution limits that allows an individual to earn tax-free investment income and capital gains in the account. TFSA accounts were available starting in January 2009. Canadian residents aged 18 and older with a social insurance number (SIN) can open a TFSA. Contributions to a TFSA are not tax-deductible. Withdrawals are tax-free and you regain your contribution room the following year. You do not need earned income to accumulate contribution room. There is no requirement to convert the TFSA to any other type of plan at any age.

Discussion:

Upon their inception in January 2009, it was easy for investors to ignore TFSAs as the maximum contribution was $5,000 and it involved opening and learning about a completely new type of investment account in Canada. However, the cumulative contribution room (assuming you were eligible for all years) is now $63,500 for 2019 and these accounts reflect a growing portion of your overall investments. According to the Canada Revenue Agency (CRA), in 2016, there were 13,473,000 TFSA holders with the total value adding up to $232 billion dollars. A hypothetical TFSA account earning 5% per year would be worth approximately $85,000 today. Interestingly, British Columbia’s age of majority is 19 meaning an 18-year-old may start accruing TFSA contribution room but be unable to open a TFSA account. Two big advantages for TFSAs include:

  1. TFSAs give Canadian residents financial and tax planning options outside of taxable investment accounts and registered retirement savings plans (RRSPs).
  2. TFSAs withdrawals are not taxed and not included in taxable income Ð meaning there is no impact on income-tested benefits from the federal government, such as Old Age Security (OAS) and Guaranteed Income Supplement (GIS) or credits such as the age credit.

If you would like more information on this topic, please contact a member of the Empire CPA team by filling out the contact form below.

Canadian and foreign tax laws are complex and have a tendency to change on a frequent basis. As such, the content published above is believed to be accurate as of the date of this post. Before implementing any tax planning, please seek professional advice from a qualified tax professional. Empire, Chartered Professional Accountants will not accept any liability for any tax ramifications that may result from acting based on the information contained above.

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