a jar filled with coins in the foreground and some bills and scattered coins in the background

In 2009 the Government of Canada introduced the “Tax-Free Savings Account (TFSA) as a flexible, registered, general-purpose savings vehicle that allows Canadians to earn tax-free investment income to more easily meet lifetime savings needs”.

The TFSA contribution is done with after-tax dollars, so unlike an RRSP contribution it is not tax deductible. However, no tax is payable on any growth or investment income earned in a TFSA. Withdrawals from the account are not a taxable event either. In fact, any funds withdrawn from the account can be re-contributed in a future year. Take care though, that this “re-contribution” of withdrawn funds does not occur until the following calendar year at the earliest, or a CRA penalty may result.

TFSAs are available to every Canadian resident at least 18 years of age. The annual contribution limit was introduced at $5,000 in 2009, and is indexed to inflation and rounded to the nearest $500 every year. This indexing didn’t have any impact until 2013 when the annual contribution limit was increased to $5,500. In 2015 the TFSA limit was increased to $10,000 but then reduced back to $5,500 in 2016 and has remained at that level since then.  The cumulative TFSA limit from 2009 to 2018 now sits at $57,500.

Any unused contribution room can be carried forward, starting from the 2009 inception date onward. This means that if you’ve never previously contributed to a TFSA, then in 2018 you could make a total deposit of $57,500. As you can imagine, not having to incur tax on investment growth/income on an account of this size could provide meaningful tax savings in any given year depending on investment performance.

For example: John opened his TFSA in 2014, and diligently invested $5,000 in it each year until 2017. By November of 2017, his investments had done well and grown to $24,000 and John decided to withdraw all of these funds to buy a new car. As luck would have it, in June of 2018 John then received a large inheritance from a long lost uncle. His accountant has confirmed that not only does John owe no tax due to the $4,000 growth on his TFSA assets and the withdrawal in 2017, but he can now make a TFSA contribution in 2018 of $61,500.  ($24,000 that can be re-contributed plus $37,500 for past contribution room)

A TFSA can be easily set up with virtually any major financial institution in Canada. Depending on the institution, and the preferences and risk tolerance of the contributor, these funds can be used to purchase a wide variety of investments within the TFSA, including (but not limited to) stocks, bonds, mutual funds and GICs.

There is little doubt that the TFSA is a positive financial opportunity for a great many Canadians. However, the overall financial benefit is very much dependent on one’s personal financial circumstances and tax situation, so please consult your tax or financial advisor prior to moving forward.

If you would like to contact us to discuss TFSA’s or other investment opportunities in further detail please call us at 780-466-6204 or click here to email us.

Thanks to Darren Buma of KWB Chartered Professional Accountants for contributing to this article.

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