To encourage saving, the federal government introduced the TFSA Tax-Free Savings Account in 2009. In some ways, the TFSA mirrors the RRSP and RESP in that there is an annual contribution limit but contributions are not tax-deductible. A TFSA therefore lets you grow tax-free investment income such as interest, dividends and capital gains and is a great way to set aside money throughout your lifetime.
Individuals 18 years of age and older may contribute a specified maximum amount each year to a TFSA. Your TFSA contribution room is the maximum amount that you can contribute to your TFSA. Unused contribution room can be carried forward to future years. Accumulated amounts can be withdrawn from your TFSA at any time.
TAX TIP Your TFSA is much more flexible than your RRSP because your contribution room is not lost when you withdraw funds from it unlike your RRSP. However, assuming that you are in a high tax bracket, we recommend investing in a TFSA only after making the maximum contribution to your RRSP which gives you an immediate tax break because it can be deducted from your income. Please contact us now for questions and advice concerning a TFSA account.
The annual TFSA dollar limit for the years 2009, 2010, 2011 and 2012 is $5,000, $5,500 for the years 2013 and 2014, $10,000 for 2015 and $5,500 for 2016, 2017 and 2018.
There is no restriction on how withdrawals can be used. Withdrawals may be made for personal reasons, investment, or any other purpose. Since amounts accumulated in a TFSA are not taxable, it may be advantageous to invest in interest-generating investments taxed at the highest tax rate. On the other hand, investments giving rise to capital gains may have better potential returns but the risk is higher.
How It Works
Let us imagine that Justin Morneau opened his TFSA on January 4, 2016 and contributed $15,500 ($10,000 for 2015 plus $5,500 for 2016 – the maximum TFSA dollar limits for those years). It is a self‑directed TFSA and he invested in stocks that increased in value. By the end of 2016, the value in Justin’s TFSA had increased to $16,300. He was worried that for 2017, he would only be able to contribute $4,700 (the TFSA dollar limit of $5,500 for 2017 less the $800 increase in value in his TFSA through 2016). Neither the earnings generated in his account nor the increase in its value will reduce the TFSA contribution room in the following year, so Justin can contribute up to another $5,500 in 2017 to his TFSA.
TAX TIP A TFSA should definitely be considered as part of your overall saving strategy. However, you should not contribute to a TFSA if, for example, you have a group savings plan at work and there is a company matching contribution that you are not maximizing, or you are a conservative investor who will earn a low rate of return on your TFSA and you have a mortgage at a higher interest rate than your TFSA would likely earn, or you have minor children and expect to fund their post-secondary education, but haven’t maximized your Registered Education Savings Plan contributions. Please contact us now for advice on whether you should contribute to a TFSA.
June 15, 2018 Self-Employed Tax Deadline
Be sure to file your 2017 Self-Employed Individual Income Tax Return now to avoid costly penalties.
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