The TFSA is Growing Up!

This year, the Tax-Free Savings Account (TFSA) celebrates its tenth anniversary. First introduced in the 2008 Federal Budget by then Minister of Finance, Jim Flaherty, the TFSA was made available to Canadian residents over the age of 18 on January 1st, 2009. This was a timely introduction, allowing Canadians a flexible registered savings vehicle following the 2007 financial crisis. Compared to its more mature counterpart, the RRSP, the TFSA is still relatively new and often misunderstood. To celebrate its tenth year, we’ve compiled some facts about the TFSA.

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If you do not use your contribution room, any unused amounts will carry forward. As well, you can recontribute any withdrawals made in previous calendar years. Canadian residents are eligible to contribute to their TFSA’s the year that they turn 18. The annual contribution room is indexed to inflation and rounded to the nearest $500 (with the exception of a brief increase to $10,000 introduced by the Conservatives in 2015). Unlike the RRSP, there is no maximum age that you can contribute into your TFSA.

It’s important to know your unused contribution room as unlike RRSP’s, there is no allowable overcontribution amount. Any overcontribution is subject to a 1% monthly penalty tax until you have either withdrawn the excess or until the additional room becomes available in the new year. If you are unsure of your contribution room, you can check online using CRA’s My Account. You can create an account or login using your sign-in information for one of their sign-in partners.

Contributions to a TFSA can be made in cash or in-kind. If you are contributing in-kind, you may trigger a capital gain if your shares have increased in value. If you are transferring shares at a loss, you cannot claim the capital loss. We’d be happy to discuss contributing in-kind and any possible tax implications.

 What Happens When I Need Funds?

One of the TFSA’s greatest features is its flexibility surrounding withdrawals.  Withdrawals can be made at any time and without penalty.  Because your contributions were made with after-tax dollars, any withdrawals are tax-free and do not affect your income.  This makes it particularly attractive for those needing cash flow but concerned about OAS clawback levels.

Amounts withdrawn can be recontributed the following calendar year or later – regardless of whether the withdrawal was capital or growth.  For example, say you contributed $10,000 in your TFSA and you saw grow over time to $16,000.  You then decide to withdraw $6,000; which you not only earned tax-free but can withdraw tax-free as well.  And the following year, you can recontribute back the $6,000.

What’s new with the TFSA?

The TFSA allows for tax-free growth of investment income, but it does not grant the same privileges for business income.  For those trading frequently within their TFSA, the CRA may consider this the business of day trading – and expect to be paid tax on business income. Previously, if a TFSA was deemed to have earned business income, the trustee of a TFSA (the financial institution holding the TFSA) was jointly and severally liable with the TFSA for the tax owing.   However, the 2019 federal budget extended this liability to the TFSA holder as the TFSA holder is in the best position to know if their trading activities constitute a business.

This year, the CRA also clarified the tax advantage rule for registered accounts (including TFSA’s). This applies to advantages such as promotional incentives and gifts. For example, if a financial institution offers a bonus interest rate on new deposits into registered accounts during a certain period, this bonus interest is considered a return on investment; not a contribution. However, if a financial institution held a contest in which registered plan owners had a chance to win a prize (ie. Cash), the cash prize is not considered a return on investment and can only be contributed to the registered account subject to the contribution room.

Why should I contribute to my TFSA?

There are only so many opportunities to earn income tax-free and with 10 years of built-up contribution room, investing $63,500 tax-free is nothing to scoff about. As of 2016, Canadians had contributed $54,831,843,000 into their TFSA’s with a current market value of $232,896,180,000! (source). Over time, TFSA’s have become a key player in Canadian’s retirement plans.

Whether you are 18 years old and looking to save money for a few years to buy a home or you are 65 and worried about your income levels affecting your government benefits, the TFSA may be the investment vehicle for you.

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