Tax-Free Savings Account (TFSA) for Individuals

A Tax-Free Savings Account is a new way for residents of Canada to set money aside, tax-free, throughout their
lifetimes.

Contributions to a TFSA and the interest on money borrowed to invest in a TFSA are not tax deductible. The
income generated in the TFSA is tax-free when withdrawn.

Who is eligible for TFSA

Any individual (other than a trust) who is at least 18 years old, who is a resident of Canada and has a valid
Social Insurance Number (SIN) can be a holder of a TFSA.

You cannot contribute to a TFSA until you turn 18. However, when you turn 18, you will be able to contribute up
to $5,000 because this amount will not be prorated.

Example Damian turns 18 years old in June, 2009. He will not be able to contribute to a TFSA until that month.

How to set-up a TFSA?

You set up a TFSA through a bank, credit union or other financial service provider who is eligible to issue aTFSA. They are referred to as the issuer of the plan.
As the TFSA holder, you will need to provide your social insurance number (SIN) and date of birth to the issuer,
so that the issuer can register your qualifying arrangement as a TFSA. Failing to provide this information or
providing incorrect information may cause the registration of the TFSA to be denied, resulting in possible tax
consequences.

You can have more than one TFSA at the same time, as long as the total amount of all contributions during the
year does not exceed your TFSA contribution room for that year.

Self-directed TFSA

Call us for assistance to set up a self-directed TFSA if you prefer to build and manage your own investmentportfolio by buying and selling a variety of different types of investments.if you are considering this type of arrangement, you may want to consult with your financial institution.

Types of investments allowed in the TFSA

Generally, the types of investments that will be permitted in a TFSA are the same as in a registered retirement
savings plan (RRSP).

This would include mutual funds, securities listed on a designated stock exchange, Guaranteed Investment
Certificates (GICs), bonds, and certain shares of small business corporations.

You can contribute foreign funds to a TFSA. However, your financial institution will convert the funds to
Canadian dollars when reporting this information to the CRA. Your contributions cannot exceed your annual
contribution limit in Canadian dollars.

You can also make "in kind" contributions to your TFSA, as long as the property is qualified investments. We will
consider that you have disposed of the property for its fair market value (FMV) at the time of the contribution.
If the FMV is more than the cost of the property, you will have to report the capital gain in your income tax
return. However, if the cost is more than the FMV, the resulting capital loss cannot be claimed. The amount of
the contribution will be equal to the FMV of the property.

Impact on Income-tested Benefits

You can withdraw money from the TFSA at any time and for any reason, with no tax consequences and without
affecting your eligibility for federal Income-tested Benefits and Credits.

No Clawback - on your Old Age Security (OAS) benefits, Guaranteed Income Supplement (GIS) or
Employment Insurance (EI) benefits will not be reduced as a result of the income earned or the amounts
withdrawn from a TFSA.

The income earned in the account or the amount withdrawn from a TFSA will also not affect your eligibility for
the Canada Child Tax Benefit (CCTB), the Goods and Services Tax Credit (GSTC), the Working Income Tax
Benefit (WITB), or the age credit.

Example: Aydan is retired and receives the GIS as well as the OAS and the Canada Pension Plan (CPP) benefits. He earns $500 a year in interest income from his TFSA savings. Neither this income nor any TFSA withdrawals will affect the GIS benefits, or any other federal income-tested benefits and credits he receives. If this $500 were earned on an unregistered vehicle, it would have to be included on his tax return and could be subject to a Social benefit repayment.

 

Excess contributions

If, at any time in a calendar month, there is an excess TFSA amount in your account, you will be subject to a
tax of 1% per month on the highest excess amount, for each month that the excess remains in the account.

 

Taxation of a TFSA

All amounts in the account are not taxable, except in the following cases:

• If, at any time in a calendar month, there is an excess TFSA amount in your account, you will be subjectto a tax of 1% of the highest such amount in that month;
• If you, while a non-resident of Canada, make contributions to a TFSA, you will be subject to a tax of 1% per month on the amount you contributed. This will continue to apply for each month that the amount
  contributed remains in the TFSA and will continue to apply until the earlier of:
  • when the total amount is withdrawn and designated as a withdrawal in connection with the
    contribution from the account; or when you become resident of Canada.
• If property that is considered to be a prohibited investment or a non-qualified investment is required, or
  if property held in the account becomes such, a tax of 50% of the fair market value (FMV) of the
  property, at the time it was acquired or that it became a non-qualified or prohibited investment is
  payable by the holder. When a TFSA holds a prohibited investment, the holder will also be subject to an
  additional tax which is based on income earned from the prohibited investment.
• In the case of a trusteed TFSA, the income earned in the account and paid to a beneficiary during the
  exempt period will be included in that beneficiary's income.

Note

If the income earned in the account during the exempt period is not paid out to a beneficiary during that
period, it will be included in the trust's income in the trust's income tax return.

• If an annuity contract or a deposit ceases to be a TFSA, the account holder is deemed to have disposed of the contract or the deposit at FMV immediately before the contract or the deposit terminated.
  Earnings that accrue in the account after the holder's death will be taxable to the beneficiary of the
  account.
• When, for a calendar year, an advantage in relation to the TFSA is extended to the holder of the TFSA or
  someone who does not deal at arm’s length with the holder, the amount of tax payable by the holder is;
  in the case of a benefit, the FMV of the benefit; and in the case of a loan or a debt, the amount of the
  loan or debt.

 

Call us at (416) 562-0808 for a free consultation and evaluation of your current financial portfolio and how to benefit from a TFSA investments in your emergency and long term financial planning.  Click here to view the Financial Services we offer individuals and businesses.

 

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