Tax-free savings accounts are available for Canadian residents
who have a valid social insurance number (SIN), and who
have reached the age of majority
(18 or 19) in
their province or territory. When the age of majority in the province or
territory is 19, TFSA contribution room still accumulates from age 18.
If the age of majority is received in December of a year, the
individual still has available the total amount of contribution room for
that year.
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:
all investment income (interest, dividends, trust
distributions and
capital gains) will accumulate tax-free
contributions are not tax-deductible
withdrawals are not taxable
capital losses are not tax-deductible
dividends will not be eligible for the dividend tax
credit
Borrowing to Invest in a TFSA
Interest on money borrowed to invest in a TFSA is
not tax deductible.
A TFSA can be used as security for a
loan.
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.
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.
A TFSA cannot borrow - a TFSA that borrows money will be deregistered.
If a TFSA holder holds a foreign investment that issues a stock
dividend, there may be a charge to the account, which may cause an
overdraft.
According to Tax Interpretation (TI) 2013-0486491I7, unintended
overdrafts caused by a fee charged to the TFSA, that is "quickly or
naturally reversed or that are infrequent and inadvertent", would
not cause deregistration of the TFSA.
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:
Make income from deliberate overcontributions and
prohibited investments subject to existing anti-avoidance rules in the
Income Tax Act
Make income attributable to non-qualified
investments taxable at regular income tax rates.
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.
Prohibit asset transfer transactions (swap
transactions) between TFSAs and other accounts.
Information on the changes is included in our TFSA articles below.
TFSA
Maximizer Schemes - when interest expense can be deemed unreasonable and
disallowed, including the use of a mortgage investment companies (MIC), by Jamie
Golombek, CPA, CA, CFP, CLU, TEP. See related CRA warning below.