Tax-Free Money for What Matters to You

The Tories have promised something for investors since they were elected. The biggest election promise that I was hoping for this year was the capital gains exemption that they spoke of a couple years back.

You probably know by now that the new budget does not include the capital gains exemption. However, there is a big bright spot in the budget for investors, that is the introduction of the Tax Free Savings Account (TFSA).

The TFSA will allow Canadians to set money aside in eligible investment vehicles and watch those savings grow tax-free throughout their lifetimes. TFSA savings can be used to purchase a new car, renovate a house, start a small business or take a family vacation.

Canadians from all income levels and all walks of life can benefit.

How the TFSA works:

Starting in 2009, Canadians aged 18 and older can save up to $5,000 every year in a TFSA.
Contributions to a TFSA will not be deductible for income tax purposes but investment income, including capital gains, earned in a TFSA will not be taxed, even when withdrawn.
Unused TFSA contribution room can be carried forward to future years.
You can withdraw funds from the TFSA at any time for any purpose.
The amount withdrawn can be put back in the TFSA at a later date without reducing your contribution room.
Neither income earned in a TFSA nor withdrawals will affect your eligibility for federal income-tested benefits and credits.
Contributions to a spouse’s TFSA will be allowed and TFSA assets can be transferred to a spouse upon death.

How is the TFSA different from your RSP?

An RRSP is primarily intended for retirement. The TFSA is like an RRSP for everything else in your life.

Contributions to an RRSP are deductible and reduce your income for tax purposes. In contrast, your TFSA savings will not be deductible.Withdrawals from an RRSP are added to your income and taxed at current rates. Your TFSA withdrawals and growth within your account will not—they will be tax-free.

For example, Robert withdraws $20,000 tax-free from his TFSA to renovate his home. Robert will be able to re-contribute the $20,000 to his TFSA in the future without affecting his other available contribution room. Had he used his RRSP savings, he would have needed to withdraw up to $37,000 to pay taxes and cover the cost of the renovation, and this contribution room would have been lost.

Benefits of Saving in a TFSA:

Because capital gains and other investment income earned in a TFSA will not be taxed, a person contributing $200 a month to a TFSA for 20 years will enjoy additional savings of $11,045 compared to saving in an unregistered account.

Not everyone is able to save each and every year. Those who cannot contribute $5,000 in a given year will be able to carry forward their unused contribution room to future years.

Couples often save and plan together, so Canadians can contribute to their spouse’s or common-law partner’s TFSA, depending on the spouse’s or partner’s available room.

Do not hesitate to contact me if you would like more information on that matter.

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