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What Is a Tax-Free Savings Account (TFSA)?

A Tax-Free Savings Account (TFSA) is a flexible savings option for Canadians who are 18 or older with a valid Social Insurance Number (SIN). Through a TFSA, you can grow your savings tax-free for life. While contributions are not tax-deductible, any earnings within the account—such as interest, dividends, or capital gains—are not taxed, even when withdrawn.

Eligibility and Opening a TFSA

To qualify for a TFSA, you must:

• Be at least 18 years old (19 in some provinces or territories).
• Be a Canadian resident with a valid SIN.

Contribution room begins accumulating from the year you turn 18, but in provinces or territories where the legal age to open a TFSA is 19, you can only contribute after turning 19.

You can open multiple TFSAs as long as your total contributions don’t exceed your available contribution room. To open a TFSA, contact a financial institution like a bank, credit union, or insurance company with your SIN and birthdate.

TFSA Contributions and Contribution Room

Your TFSA contribution room is the total you can contribute to your TFSAs and is calculated as follows:

• The annual TFSA limit.
• Unused contribution room carried forward from previous years.
• Any withdrawals made in the prior year (this amount is added back the following year).

Below are the annual TFSA contribution limits since the program started:

2009–2012: $5,000
2013–2014: $5,500
2015: $10,000
2016–2018: $5,500
2019–2022: $6,000
2023: $6,500
2024: $7,000

Stay within your TFSA limit, as over-contributing will result in a 1% monthly penalty on the excess contribution until it’s removed.

Withdrawals and Re-Contributions

One of the key benefits of a TFSA is that you can withdraw funds anytime for any reason, with no tax consequences. The amount withdrawn is added back to your contribution room at the start of the next calendar year.

If you re-contribute in the same year as your withdrawal, ensure you have enough contribution room. Otherwise, it could lead to over-contribution penalties.

What Happens If You Become a Non-Resident?

As a non-resident of Canada, you can keep your TFSA and continue earning tax-free income. However, you cannot contribute to the account during non-residency. Contributions made while a non-resident are taxed at 1% per month until removed. Additionally, you will not accumulate any new contribution room during this time.

How Withdrawals Affect Government Benefits

Withdrawals from a TFSA do not lower your eligibility for income-tested government benefits and credits, such as the Canada Child Benefit or Old Age Security. This makes TFSAs a great savings option for those who rely on these programs.

Transfer Options and Designations

Transfers between TFSAs are allowed without impacting your contribution room, but they must be completed directly by your financial institution. During marital or common-law partnership breakdowns, TFSA funds may also be transferred between accounts without using contribution room, if the necessary conditions are met.

In the case of death, a spouse or common-law partner can inherit the account tax-free if they are designated as a successor holder.

Common Tax Implications

While TFSAs provide significant tax advantages, there are specific instances where taxes can apply:

• Excess Contributions: A 1% tax is applied monthly to the highest excess contribution during that month.
• Non-Resident Contributions: A 1% monthly tax applies to contributions made while a non-resident.
• Prohibited or Non-Qualified Investments: Taxes may be charged on these types of investments.
• Advantage Rules: Taxes apply to the value of benefits or loans based on improper usage of a TFSA.

Carefully monitor your contributions and investment choices to avoid penalties.

Conclusion

The TFSA is a powerful savings option, offering tax-free growth, withdrawals, and no impact on government benefit eligibility. By understanding its rules, you can make the most of this tool in your financial plan.

For personalized advice and guidance, it’s always best to work with a professional. Experts like JHG Corporate and Tax Services Inc can ensure you’re compliant with all regulations and help you maximize the benefits of your tax return.

Source: This information is based on the Canada Revenue Agency’s “Tax-Free Savings Account (TFSA), Guide for Individuals” (RC4466).

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