Tax Free Savings Accounts

A Tax Free Savings Account (TFSA) is an effective and flexible savings vehicle which allows Canadian residents 18 years of age or older, to set aside money and watch it grow tax free.  These savings can be used for any purpose, short term savings for a new car, wedding plans, home renovations, or family vacations and long term savings to fund education and retirement.  There is no taxation for properly administered withdrawals.  A TFSA is not designed to replace Registered Retirement Savings Plan (RRSP’s) nor Registered Education Savings Plans (RESP’s) but should be viewed as another tool in your financial plan and integrated based on your own specific situation.

You can deposit up to a maximum of $5000 each year retroactively to 2009.  Your contributions are not tax deductible but the investment income you earn, including capital gains, interest and dividends is not taxable, ever.  The chart below illustrates the “tax-free” benefit of this type of savings account.

Because your investment income is not taxable, your account has the potential to grow that much more.  A person contributing $200 a month to a TFSA for 20 years will enjoy additional savings of $11,045 compared to savings in a “regular” savings account.

Note: Combined federal and provincial tax savings based on a $200 monthly contribution for 20 years and a 5.5% rate of return.  For unregistered savings, a 21% average tax rate on investment income is assumed (based on 40% interest, 30% dividends and 30% capital gains, and a middle-income earning account holder).

When you open a TFSA, you can name a beneficiary, thereby avoiding any estate tax issues.  You cannot do this with a regular savings account at a bank, a further benefit to you.

Neither the income earned or the withdrawls made from your TFSA will affect your eligibility for federal income-tested benefits and credits, such as the Guaranteed Income Supplement and the Canada Child Tax Benefit.  For people with modest incomes, this is a great savings tool.

At CIC Financial, we can offer you many investment options for your TFSA.  Contact us today to get started on building your savings, tax-free!