It started with a concept that saving money should be for everyone; All Canadian residents who are at least 18 years old can now save up to $5000 each year through The Tax-Free Savings Account – a flexible, registered account that allows earning a tax-free investment income that can help you meet short as well as long-term goals. Canadian TFSA will create a new wave of savings and investment.
What is TFSA?
Web definitions: “The Tax-Free Savings Account (TFSA) is an account, which provides tax benefits for saving in Canada. Contributions to a TFSA are not deductible for income tax purposes. Investment income (including capital gains), earned in a TFSA is not taxed, even when withdrawn.”
History of TFSA
It was introduced by Jim Flaherty, Canadian federal Minister of Finance, in the 2008 federal budget and came into effect on January 1, 2009. This was the time when the recession was at its peak when every other government throughout the world was trying to stimulate spending, not saving. Canadians are awarded TFSAs permit of Tax savings to tuck away up to $5,000 a year on which there is nothing to pay in taxes on whatever that money earns.
The C.D. Howe Institute As supported this measure: “This tax policy gem is very good news for Canadians, and Mr. Flaherty and his government deserve credit for a novel program”.
Benefits of TFSA
The Tax-Free Savings Account (TFSA) is a new investment option for Canadian residents 18 years and older to earn tax-free investment income more easily to meet lifetime savings needs. It offers a flexible form of investment that allows the holder to withdraw money from his/her account at any time, free of taxes. Its allocations into the account are non-deductible; however, it represents a lucrative opportunity for the individuals with leftover income to invest in productive savings, without the burden of time constraints. The Tax-Free Savings Account (TFSA) also complements existing registered savings plans like the Registered Retirement Savings Plans (RRSP) and the Registered Education Savings Plans (RESP).
TFSA holds a carry-over nature, that’s why any unused portion under $5,000 cap can be carried forward to subsequent years, without any upward limit. It also allows income splitting to an extent, which allows a higher-earning spouse can contribute to the TFSA of a lower-earning spouse.
Investment income in a TFSA is not taxed, even when withdrawn, whether you are earning in interest, dividends or capital gains. This tax-free compound income means that your money will grow more quickly inside a TFSA in relation to your taxable account. Moreover, an annual contribution limit of $5,000 per year will be indexed to the Consumer Price Index (CPI), in $500 increments, assuming 2% inflation, it will go up to $5500 in 2012.
TFSA’s Eligible Investments
Stocks, bonds, mutual funds, GICs, ETFs, savings accounts and else, TFSA can hold any investments that are RRSP eligible, also includes eligible shares of private corporations, publicly traded shares on eligible exchanges, various debt obligations, installment receipts, money denominated in other currencies, trust interests like mutual funds and real estate investment trusts, annuity contracts, warrants, registered investments, royalty units, partnership units, depository receipts, and rights and options.
How TFSAs different from RRSPs?
Tax treatment of a Tax-Free Savings Account (TFSA) is opposite to a Registered Retirement Savings Plan (RRSP), there is a tax deduction for contributions and withdrawals of contributions and investment income are all taxable with RRSP. On the other hand, there is no tax deduction for contributions to TFSA, and also there is no tax on withdrawals of investment income or contributions from the account. Every person is entitled to invest money up to $5,000 per year that can be placed into a TFSA. This amount can then be withdrawn without penalty and a time limit. Unlike RRSPs that must be withdrawn before the holder reaches 71, where the TFSA doesn’t expire. Moreover, the contribution room for the funds withdrawn from a TFSA is reallocated in the tax year after the withdrawal, unlike the RRSP, where the contribution room is permanently reduced once the contribution is made.
In the words of The Canada Revenue Agency (CRA) that describes the difference between a TFSA and an RRSP: “An RRSP is primarily intended for retirement. The TFSA is like an RRSP for everything else in your life“.
Does TFSA require expansion?
According to Stephen Harper’s latest proposal, it would double the contribution limit to the Tax-Free Savings Account (TFSA) to $10,000 a year; Harper pledges to raise tax-free savings limits. It’s good news for people who are already rich enough to get more tax credit on their easy savings and the banking sector that would willing to see the expansion of the TFSA that mean they will get more deposits, more lending and resulting in more profits. The richer would get a bigger tax shelter. But on the other hand, there is no broad based demand to double the limit. Indeed, TFSA is a good program and rather than expansion it should be capped.
I always appreciate Stephen Harper and his government because these people have to face the biggest global recession and have successfully handled in keeping up our dollar value but our economy is still under pressure with a group of those people who are still unemployed, without enough savings to invest into future and looking for the better jobs and if it’s really mandatory to go for an expansion then people with financial concern really want to know about:
- Have the majority of the Canadians already taken the TFSA program?
- How TFSA expansion will affect future tax revenues?
It seems there are a lot of people who don’t agree with a TFSA expansion program; Armine Yalnizyan is a senior economist with the Canadian Centre for Policy Alternatives, here’s you can also read his own findings, Who really benefits from TFSA? The wealthy, for sure.
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