An Account Suitable to almost Everyone

January 23, 2023 | Elaine Law


Share

Tax Free Savings Account (TFSA)

A Tax-Free Savings Account (TFSA) is a savings vehicle available to Canadian residents 18 years of age or older. It allows individuals to earn investment income tax-free within the account. The government of Canada introduced the TFSA in 2009 as a way to encourage Canadians to save for their future. One of the main benefits of a TFSA is that any capital gains, dividends, or interest earned within the account are not subject to income tax. This means that individuals can earn a higher return on their savings compared to a regular taxable investment account. Additionally, withdrawals from a TFSA are also tax-free. Individuals are given a TFSA contribution room, which is the maximum amount they can contribute to their TFSA each year. The contribution room is cumulative, meaning that any unused room can be carried forward to future years. The total TFSA contribution limit from 2009 to 2023 is $88,000. The annual TFSA dollar limits from 2009 to 2023 are as follows:

It’s important to note that if an individual exceeds their TFSA contribution room, they will be subject to a 1% tax on the excess amount for each month it remains in the account. TFSAs are also flexible and can be used to hold a variety of different types of investments, such as cash, GICs, bonds, mutual funds, ETFs, and stocks. This means that individuals can choose the investment options that best suit their risk tolerance and financial goals.

Given the big market downturn, many stocks and bonds are now less expensive compared to their prices last year, presenting a good opportunity for investors to buy at a lower price point. Furthermore, the current higher interest rates compared to last year also make a TFSA an attractive option for savings.

Another great advantage of a TFSA is its ability to facilitate income splitting among family members. TFSA is a great way to do income splitting by making a contribution to your spouse's or adult child's TFSA account. Any income or capital gains earned within these TFSA accounts will not be attributed back to the contributor, which means that the income earned within these accounts can be taxed at the lower-income spouse or adult child's tax rate. This can be particularly useful for families where one spouse has a significantly higher income than the other. By making contributions to the lower-income spouse's or children’s TFSA, the family can effectively reduce their overall tax bill by shifting income to the lower-income spouse or children.

A TFSA can also be a good vehicle for seniors who do not need cash in the account. If a TFSA account has a beneficiary, the amount in the account will not be considered part of the owner's estate and can be passed onto the beneficiaries tax-free, without having to worry about capital gain tax or probate tax once the owner passes away. This can help to minimize the tax implications for the estate and maximize the value of the inheritance. Additionally, if a senior does not need the money from the withdrawal of their Registered Retirement Income Fund (RRIF) account, they can re-invest the withdrawal in their TFSA and let it grow tax-free. This can be a great way for seniors to continue saving for their future without having to worry about the tax implications of their investment income. It’s important to note that RRIF withdrawals are considered taxable income, but withdrawals from a TFSA are tax-free, and even if the senior is already retired and living off their RIF or pension, they are still eligible to make TFSA contributions.

Another benefit of a TFSA is that even if you were a Canadian resident but have become a non-resident, you are still allowed to keep your TFSA and won't be subject to Canadian taxes on any interest earned or capital gains generated in the account. This means that even if you have moved to a foreign country and are no longer a resident of Canada, you can continue to hold and grow your savings/investments in your TFSA without having to worry about Canadian taxes on the investment income. Additionally, if you choose to withdraw from your TFSA as a non-resident, you won't be subject to any Canadian taxes on the withdrawals you make. Therefore, even if you have become a non-resident, keeping your TFSA and positioning it for long-term growth can be a wise decision. It's important to note that as a non-resident, you will no longer be eligible to contribute to a TFSA. As well, if your country of residency has a tax treaty with Canada, you may still have to pay taxes on your TFSA withdrawal in that country. We recommend obtaining tax advice from a qualified tax professional in your country of residence to determine how the funds in your TFSA will be treated for tax purposes in that jurisdiction.

In conclusion, the flexibility and tax-free benefits of a TFSA make it a great choice for Canadians of all ages (18 or above), including those who have become non-residents. A TFSA is a great option for saving for short-term and long-term financial goals, such as a down payment on a home, a vacation, retirement, income-splitting, and estate planning. The recent market correction and the current high-interest rates make it even more attractive to consider investing in a TFSA in 2023. If you need assistance to re-position your TFSA to achieve your long-term goals, please don’t hesitate to reach out to us.