Columnists
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New tax-free savings account on the way
Andy Wong Guest columnist Monday, October 27, 2008 Previous columns 
Ready or not, here it comes. On Jan. 1, 2009, Canadians and residents in Canada will have access to a new, innovative tax-free investment program. The new Tax Free Savings Account (TFSA) is a very flexible and easy-to-use program. The government hopes this program will kick-start a new generation of savers by allowing them to rack up investment gains without paying taxes. Investment income, i.e. capital gains, dividends or interest in a TFSA, will be completely tax-free. Think of the new plan as a Registered Retirement Savings Plan (RRSP) in reverse. TFSA contributions are not tax-deductible but investment incomes and withdrawals are tax-free. Another key feature of the TFSA is its flexibility, making it ideal for financing short-term consumption needs. Saving for a big family vacation? You can plunk $5,000 into a TFSA, let it grow tax-free in a secured investment and withdraw it anytime with no tax consequences. This flexibility feature will (hopefully) reduce uneconomical behaviour such as RRSP withdrawals. Residents in Canada aged 18 or older can contribute $5,000 annually into a TFSA. TFSAs can invest in the same investments as your RRSP, i.e., stocks, bonds, mutual funds, GICs and term deposits, etc. Unlike your RRSP, your TFSA can be used as collateral for loans. Another nice touch - the $5,000 annual contribution ceiling is indexed to inflation in $500 increments. Unused TFSA contribution can be carried forward indefinitely. Withdrawals from your TFSA are also added to the following year's contribution room. This generous feature allows you to re-contribute funds previously withdrawn. For example, if you contributed $2,000, and withdrew $1,000 in 2009, your 2010 TFSA contribution limit will be $9,000 ($5,000 annual limit plus $3,000 unused 2009 room plus $1,000 withdrew). When you die, your TFSA funds can be transferred into your surviving spouse's TFSA account without affecting your spouse's contribution room. The same rules also apply to transfers between spouses upon separation or a divorce. After you become a non-resident of Canada, your TFSA retains its tax-exempt status. Investment income continues to grow tax-free and you can make tax-free withdrawals after you leave Canada. However, as a non-resident, you cannot make new contributions and your TFSA does not build up unused annual contribution room during the years you remain a non-resident. Interest on money borrowed to invest in a TFSA is not tax deductible, similar to the interest on your RRSP loans which are also non-deductible. Excess TFSA contributions are subject to a tax of one per cent per month, just like the one per cent per month penalty on excess RRSP contributions. You can open a TFSA at most financial institutions such as a bank, trust company, or life insurance company - the same institutions offers RRSPs. You can own more than one TFSA. The Canada Revenue Agency will track your cumulative TFSA contribution room if you file your tax return. For more TFSA information, go to: http://www.cra-arc.gc.ca/gncy/bdgt/2008/txfr-eng.html
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