Tax-Free Savings Accounts (TFSAs)

Customer-owners have a new way to save money with the Tax-Free Savings Account (TFSA). You can save or invest money without paying tax on the income it earns and you also can withdraw it tax free. Canadians now have flexible account options for a lifetime of savings needs.

The TFSA was introduced by the Government of Canada in Budget 2008 and passed by legislation on June 18, 2008. 

Who do I contact for more information?

  • Provincial Government Employees Credit Union offers the Tax-Free Savings Account to you effective January 1, 2009.
  • You can visit our branch or phone us.  Phone: 902-424-5712  Toll-free: 1-888-484-0880

What is the Tax Free Savings Account?

The TFSA is a registered savings account that allows taxpayers to earn investment income tax-free inside the account. Contributions to the account are not deductible for tax purposes, and withdrawals of contributions and earnings from the account are not taxable.TFSA savings can be used for a variety of needs, for example: to purchase a new car, renovate a house, start a small business or take a family vacation.

When did it become available?

The Government of Canada processed the TFSA on January 1, 2009.

Who is eligible to open a TFSA?

Any individual (other than a trust) who is a resident of Canada and 18 years of age or older would be eligible to establish a TFSA. The only requirement will be that the individual must have a Social Insurance Number when the account is opened. There will be no limit on how many TFSAs each person can set up, keeping in mind that the allowable yearly tax-free contribution is a combined total of all of these accounts.

How would I know what my TFSA contribution room is for a given tax year?

The Canada Revenue Agency (CRA) will determine TFSA contribution room (based on information provided by issuers) for each eligible individual who files an annual T1 individual income tax return.

Individuals who have not filed returns for prior years (because for example, there was no tax payable) would be permitted to establish their entitlement to contribution room by filing a return for those years or by other means acceptable to the CRA.

Canada Revenue Agency can confirm your contribution room. The CRA recommends TFSA holders take advantage of their online service option My Account to obtain the most up-to-date information about their TFSA transactions and available TFSA Contribution Room. Any changes to the holder's TFSAs are uploaded daily as the TFSA information from TFSA issuers is received and processed.

If I don't have the money to invest in a given year, would I be able to use any unused contribution room in a future year?

 Yes, there is no limit on the number of years unused contribution room could be carried forward.

TFSA Contribution Room:

The TFSA contribution room is made up of: $5,500 per year limit ($5,000 prior to 2013), any unused TFSA contribution room in the previous year, and any withdrawals made from the TFSA in the previous year, excluding qualifying transfers.

Your contribution room began building the first year TFSAs were offered in 2009 and any unused contribution room can be carried forward to future years. For example, if you opened your TFSA in 2013, your contribution room is $25,500 ($5,000 for 2009, 2010, 2011 and 2012 plus the $5,500 limit for 2013 provided you were 18 or older in 2009).

What kind of investments can you hold in a TFSA?

A TFSA would generally be permitted to hold the same investments as a registered retirement savings plan, such as:

  • GICs, term deposits, high-interest savings accounts
  • Shares
  • Bonds
  • Cash

Where a TFSA holds a non-qualified investment, a tax of 50% of the fair market value (FMV) of the non-qualified investment will be applied.

Could I use my TFSA assets as security for a loan?

Unlike RRSPs, which cannot be used as collateral for a loan (unless you want your RRSP deregistered and immediately taxed), TFSA assets can be used as collateral. This may facilitate investors in obtaining secured credit at more favorable rates.

How is a TFSA different from a Registered Retirement Savings Plan (RRSP)?

An RRSP is primarily intended for retirement. The TFSA is like an RRSP for everything else in your life. Both plans offer tax advantages, but they have key differences.

  • Contributions to an RRSP are deductible and reduce your income for tax purposes. In contrast, your TFSA contributions 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.

While the two plans are meant to be tax-neutral, RRSPs will tend to be the better choice when the tax rate upon withdrawal is expected to be lower than the tax rate upon original contribution. Conversely, TFSAs will make more sense if your tax rate (including the effect of RRSP withdrawals on reduced income-tested benefits) will be higher upon ultimate withdrawal than it was when you contributed.

The after-tax rates of return on TFSA and RRSP savings are equivalent when effective tax rates are the same at the time of contribution and withdrawal: the value of the tax deduction available for RRSP contributions is equivalent to the value of withdrawing funds from a TFSA on a tax-free basis. The rate of return from saving in either a TFSA or an RRSP is superior to unregistered saving (sav).

 

Where can I find more information?

 

Note: The content herein is not intended to provide specific tax advice and should not be relied upon in this regard. Please consult your tax advisor to find out which strategies suit your tax situation. Provincial Government Employees Credit Union makes no guarantee, representation, or warranty and accepts no responsibility or liability as to the tax treatment of these services.