I have noticed there are a lot of questions around the TFSA so here is a list of TFSA FAQ`s I am sure it does not answer all questions about the tax free savings account, but hope it answers some. You can find some TFSA strategies here.
1. What is the Tax-Free Savings Account?
A Tax-Free Savings Account (TFSA) is a new registered savings account introduced by the Federal Government in the 2008 Budget. All Investment income (interest and dividends) and capital gains in the account will grow tax-free.
2. Who is eligible to open a TFSA?
Any Canadian resident who is 18 years of age or older will begin to accumulate contribution room in 2009, no income is needed.
3. What can a TFSA be used for?
TFSA can be used to save for a variety of short-term and long-term goals. Some TFSA strategies are discussed here.
4. What kind of investments can you hold in a TFSA?
In a TFSA you can hold the same investments as a registered retirement savings plan (RRSP), such as:
- GIC
- Term Deposit
- Savings Account
- Mutual Funds
- Stocks
- Bonds
5. How much am I allowed to contribute per year?
You can contribute up to $5,000 each year. The amount will be indexed to inflation.
6. What happens if I contribute more than my contribution room?
Similar to an RRSP, excess contributions to a TFSA above and beyond the annual contribution limit will be subject to a 1% per month penalty tax by the Canada Revenue Agency (CRA) on your excess contribution amount until withdrawn.
7. If I am unable to contribute in a given year, will I be able to use my unused contribution room in a future year?
If you are eligible, you will accumulate contribution room each year. Your unused contribution room can be carried forward indefinitely. There is no limit on how much contribution room you can accumulate.
8. Would contributions and withdrawals have any impact on my taxes and income-tested benefits?
Nope. Neither income earned in your TFSA, nor withdrawals, will affect your eligibility for types of benefits from the Federal Government such as the Canada Child Tax Benefit, Old Age Security (OAS) and the Guaranteed Income Supplement (GIS) or credits such as the Age Credit.
9. Are there any restrictions on withdrawals?
No, you can withdraw any amount from the account for any reason. NOTE: There maybe restrictions placed by your financial institution or the investment vehicle (i.e. locked GIC etc)
10. If I withdraw money from my TFSA, can I re-contribute this withdrawn back?
Not in the same calendar year. Withdrawals you make in the current calendar year will be added to your unused contribution room and can be re-contributed the following year. For example:
- in January 2009 you contribute $5000, in July you withdraw $3000.
- You can not contribute the $3000 back in 2009
- January 2010 you can contribute $8000, $5000 annual limit PLUS $3000 2009 withdraw.
11. Can I use my TFSA assets as security for a loan?
Yes. Assets within your TFSA can be used as collateral for a loan, different then the RRSP.
12. Can I open a joint TFSA account?
No.
13. Can a non-resident of Canada open a TFSA?
No. TFSAs can only be opened by Canadian residents.
If you become a non-resident, you would be allowed to maintain your TFSA, and you would not be taxed on any earnings in the account or on withdrawals; however, you would not be allowed to contribute, and no contribution room would accrue for any year throughout which you are a non-resident.
14. What is the main benefit of saving in a TFSA?
A TFSA allows you to set money aside in eligible investments and watch those savings grow tax-free throughout your lifetime. You can withdraw amounts for any purpose. There are no restrictions. TFSA can be a very powerful investment/saving tool, here are some investment strategies:
Other Resources:
Where Does All My Money Go TFSA Strategies
Million Dollar Journey how to use TFSA
Tax Free Savings Account (TFSA) FAQ,Subscribe to Financial Highway
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{ 6 comments… read them below or add one }
Hi Ray,
This article is very informative, thank you. But I was wondering if the option of having a spousal TFSA accounts is available, like RRSP accounts.
@ Recessionista glad you find it helpfull.
SPOUSAL TFSA: Unfortunatly no you CAN NOT have a spousal TFSA account, HOWEVER CRA waves attribution rules when it comes to the TFSA so you could gif money to your spouse who can invest it in the TFSA and there wont be any attribution rules to worry about everything is tax free.
Hey Ray
Very informative about the TFSA. Some other interesting issues about TFSA.
There is no need for a spousal version because unlike an RRSP contribution –there is no tax issue.
Any gains earned in a TFSA are tax free forever. Plus the holdings inside a TFSA will NOT cause any claw-backs of government benefits or be subjected to a means test.
Many Canadians hold what, Richard Shillington PHd (http://www.shillington.ca/Financial_Planning/General_Advice.htm) with the C.D. Howe institutes calls “futile RRSPs”.
That is RRSP accounts that hold just enough investment to cause claw-backs of Government benefits. Getting non-inflation indexed income by losing inflation indexed income will put less money in your pocket at retirement.
Tax-free Savings Account do not cause these claw-backs
Thanks Terry,
Yes the fact that TFSA income is not inculded in the income test for OAS is a great advantage for seniors. I actually have another TFSA strategy post coming up with this included. Gordon Pape has also pointed this important feature out in his TFSA Book i’ll have a review and giveaway coming up for that as well
Wicked, thanks Ray!
Hi Ray
Thanks for the info just need a clarification
Suppose I invest $5000 in TFSA in Jan 2010 and buy stocks with it.
In April 2010 the stocks I bought gained and it makes say $7000.
What if I withdraw $2000 that I gained in April 2010?
Will $2000 be counted in as my contribution withdrawl or capital gain withdrawl?
What will be contribution room for 2011
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