The Tax-Free Savings Account (TFSA) was introduced in 2009 and offers Canadians a unique and flexible planning opportunity to save for their financial goals. Your contributions to a TFSA are not tax deductible for income tax purposes, however your savings grow tax-free inside your account. In addition, there is no tax payable when you make a withdrawal from your TFSA.
The savings you accumulate in your TFSA can be used at anytime and for any purpose – it’s completely up to you. Whether you are saving for a new car or a home purchase, your child’s education or your own retirement, a TFSA can help you reach your goal sooner.
Contributions
Canadians age 181 and over can contribute $5,5002 annually to a TFSA. Since 2009, the annual contribution limit was $5,000. Effective in 2013, the annual contribution limit has been increased to $5,500. Contribution limits are indexed to inflation in $500 increments. Any unused contribution room, dating back to 2009 or the year you turn 18, carries forward so it can be used in a future year. So if you have never contributed to a TFSA, your contribution limit for 2013 will be $25,500.
Your annual TFSA contribution limit is reported on your annual Notice of Assessment from Canada Revenue
Agency (CRA). In general, a TFSA is permitted to hold similar types of investments as an RRSP.
Withdrawals
Withdrawals from a TFSA are tax-free. An amount withdrawn in the current year will be added to your contribution room at the beginning of the following year. For example, assume a $5,500 contribution is made in January 2013, followed by a withdrawal of $5,900 ($5,500 contribution + $400 gain) in October 2013. On January 1, 2014, an additional $5,900 will be added to your TFSA contribution room.
Other Planning Opportunities
Given the tax-free nature of the investment income and flexibility regarding withdrawals and re-contributions, there are many opportunities that you and your Investment Advisor can explore to incorporate a TFSA into your overall wealth management plan.
TFSAs offer a significant income splitting opportunity. You can provide funds to your spouse, common law partner or adult children to allow them to contribute to their own TFSA (subject to their personal TFSA contribution limit). None of the income earned within their TFSA is attributed back to you.
Consider holding investments in a TFSA that would otherwise be taxed at high rates outside a registered account, such as interest income
Since neither the income earned nor withdrawals from a TFSA will affect your eligibility for federal income-tested benefits and credits (e.g. Old Age Security, GST credit, age credit), consider depositing your surplus RRIF or pension income into your TFSA.
Please contact your BMO Nesbitt Burns Investment Advisor for more information on how to get a TFSA working for you.
With permission
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 Pierre L. Gaumond,CFP, CIM, FMA, FCSI Investment Advisor & Financial PlannerContact Info: 67 Bock St., Kingston ON (613)-547-5214 (613)-547-5288website |