Clark Wealth Management Group - ScotiaMcLeod Fredericton

If you haven’t already set up a Tax-Free Savings Account (TFSA) at your bank or with your financial advisor, what are you waiting for? People will do all sorts of things to avoid or reduce the amount of tax they pay and here’s a vehicle designed for that purpose. It doesn’t get better than tax-free.

Since January 2009, Canadians have been able to contribute up to $5,000 annually to a TFSA. Investment income earned within the account is earned tax free, regardless of whether it is interest, dividends or capital gains income. It is even a nontaxable event when funds are withdrawn from the account.

To the end of 2009 (latest available stats from Investor Economics) there have been about 4.7 million TFSAs opened in Canada. That’s about 1 in 5 eligible Canadians.

A TFSA makes sense for almost anyone who has non-RRSP savings. They can be used for emergency funds, to save for things like an automobile purchase, a vacation, or the down payment on a home. They also make sense for those saving for retirement – assuming that RRSP contributions are first maximized.

The TFSA is a very flexible investment vehicle that has application for all investing Canadians, ranging from the young to retirement aged individuals no matter what their income level. For example, the TFSA is good for low income seniors because tax-free withdrawals will not trigger reductions relating to income tested benefits such as Old Age Security (OAS). High-income investors may also wish to take advantage of the TFSA and shelter interest income or foreign dividends which are taxed at the top marginal tax rate.

Here is a brief review of the facts and features of the TFSA:
1. Any individual who is resident in Canada and 18 years of age or older is eligible to have a TFSA and save up to $5,000 each year. The $5,000 contribution room will be adjusted and indexed for inflation in future years.
2. Contributions to TFSA are not deductible for income tax purposes, however investment income, including capital gains, earned in a TFSA will not be taxed.
3. A TFSA will generally be permitted to hold the same investments as an RRSP.
4. While an individual can hold more than one TFSA at any given time, all TFSA accounts are still subject to the single umbrella $5,000 contribution amount.
5. Unused contribution room can be carried forward to future years, and there is no limit on the number of years that unused contribution room can be carried forward.
6. An individual can withdraw from the TFSA at any time and for any purpose without
penalty or tax. Any amounts withdrawn from an individual’s TFSA in a year will be added to the individual’s contribution room for the following year.
7. Neither income earned in the TFSA nor withdrawals will affect an individual’s eligibility for federal income-tested benefits or credits such as the Child Tax Credit, the GST Tax Credit, or OAS.

There has been some confusion around one’s ability to re-contribute money withdrawn from a TFSA. That confusion resulted in upwards of 70,000 Canadians receiving a nasty letter from CRA this year. CRA has subsequently given everyone a pass on the penalties levied though given the widespread misunderstanding.

Here’s what you have to keep in mind to avoid this problem. When you withdraw any amount from your TFSA you must not re-contribute the funds until the following calendar year. The amount you’ve withdrawn effectively gets added to your regular $5,000 contribution limit the following year. If you do it sooner and you’ve already contributed $5,000 in that year, you will be subject to over-contribution penalties. Certainly a simple item to monitor and manage so don’t let concerns about this little complexity stop you from taking advantage of this great vehicle.

Keir Clark, is a senior wealth advisor, with Clark Wealth Management Group and branch manager at ScotiaMcLeod in Fredericton, NB. He can be reached online at www.keirclark.ca or by telephone at 506-450-6465.

Information and opinions contained herein have been compiled from sources believed reliable but no representation or warranty, expressed or implied, is made as to the accuracy or completeness