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TFSAs

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Financial Planning -> TFSAs

Tax-Free Savings Accounts (TFSAs)

Income Tax Act S. 146.2, 207.01 to 207.07

Tax-free savings accounts are available for Canadian residents who are 18 years of age or older.  The first tax year that they were available was 2009.

There is no deadline for contributions to a TFSA, as the unused contribution room is carried forward into the next year.  However, a withdrawal in any year increases the TFSA room in the following calendar year.  Thus, if you are thinking of making a withdrawal close to year end, make sure it is done by December 31st, in order to have the withdrawal amount added back to the TFSA room sooner.

In a tax-free savings account:

bullet all investment income (interest, dividends, trust distributions and capital gains) will accumulate tax-free
bullet contributions are not tax-deductible
bullet withdrawals are not taxable
bullet capital losses are not tax-deductible
bullet dividends will not be eligible for the dividend tax credit

Borrowing

bullet Interest on money borrowed to invest in a TFSA is not tax deductible.
bullet A TFSA can be used as security for a loan.
bullet According to bank representatives, a TFSA cannot be used to provide margin for linked margin brokerage accounts, although this is not disallowed by the Income Tax Act.
bullet If you wish to use your TFSA to increase your margin, you can borrow against the TFSA and put the money into your margin account.  The interest on the debt would be tax deductible.

TFSA Technical Changes

On October 16, 2009 the Minister of Finance announced amendments to the Income Tax Act to strengthen the rules applicable to Tax-Free Savings Accounts.  The amendments apply to transactions which occur after October 16, 2009.  The draft legislation and explanatory notes were released by the Department of Finance on April 30, 2010. The amendments were included in Bill C-47, which became law in December 2010.  These amendments:

bullet Make income from deliberate overcontributions and prohibited investments subject to existing anti-avoidance rules in the Income Tax Act
bullet Make income attributable to non-qualified investments taxable at regular income tax rates.
bullet Ensure that withdrawals of deliberate overcontributions, prohibited investments, non-qualified investments or amounts attributable to swap transactions, or of related investment income, from a TFSA do not create additional TFSA contribution room.
bullet Prohibit asset transfer transactions (swap transactions) between TFSAs and other accounts.

Information on the changes is included in our TFSA articles below.

bulletWhat is better - TFSA or RRSP?
bulletTFSA Contribution Rules and Limits
bulletDon't Overcontribute!  <- very important!!!  Read this so you know how it works.
bulletUnused Contribution Room
bulletTFSA Investments - qualified, non-qualified, and prohibited
bulletTFSA Withdrawals
bulletAsset Transfer (Swap) Transactions
bulletTaxes Payable re TFSA
bulletMarital Breakdown
bulletDeath of the TFSA Holder

Other TFSA Resources:

bullet TFSA vs RRSP Calculator - to help you decide which type of account is better for you.
bullet Borrow to invest
bulletCanada Revenue Agency
bullet Tax-free savings accounts
bullet RC4466 - Tax-Free Savings Account (TFSA) - Information Sheet - lots of detailed information, and examples.
bullet TFSA information for Registered Plans Administrators
bullet Department of Finance
bullet October 16, 2009 proposal re technical changes to TFSAs
bullet Budget 2008 tax-free savings account information
bullet Legislative proposals and explanatory notes re new Income Tax Act legislation on the TFSA:
bullet March , 2008 - initial legislation included in Bill C-50, which became law on June 18, 2008
bullet July 14, 2008 - revisions to the initial legislation

Tax Tips:  Everyone should have a tax-free savings account!
                 Make sure you don't overcontribute - see our article on this!

Revised: August 05, 2016

 

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