The Tax Free Savings Account (TFSA)
for Canadians
What is a Tax Free Savings Account (TFSA)?Starting in 2009, a tax-free savings account (TFSA) is a new wayfor residents of Canada to set money aside tax free throughout their lifetime. Contributions to a TFSA are not deductible for income tax purposes (opposite of an RRSP) and the income earned in the account (for example, investment income and capital gains) is tax-free, even when it is withdrawn. Interest on money borrowed in order to contribute to a TFSA is also not tax-deductible. Who is eligible for a TFSA?
Any individual (other than a trust) who is at least 18 years old who is a resident of Canada, and who has a valid social insurance number (SIN) can be a holder* of a TFSA. How to establish a TFSATo establish a TFSA, you must contact your financial institution, credit union or insurance company (issuer*). As the TFSA holder, you will need to provide the issuer with your SIN and date of birth so that the issuer can register your qualifying arrangement* as a TFSA. Failing to provide this information or providing incorrect information may cause the registration of the TFSA to be denied, resulting in possible tax consequences. You can set up a self-directed TFSA if you prefer to build and manage your own investment portfolio by buying and selling a variety of different types of investments. If you are considering this type of arrangement, you may want to consult with your financial institution. Note: An individual can have more than one TFSA at any given time, as long as the total amount contributed to all the accounts during the year does not exceed the individual’s available TFSA contribution room for that year.
Generally, the types of investments that will be permitted in aTFSA are the same as those permitted in a registered retirement savings plan (RRSP). This would include mutual funds, securities listed on a designated stock exchange, Guaranteed Investment Certificates (GICs), bonds, and certain shares of small business corporations. You can also make “in kind” contributions to your TFSA, as long as the property is a qualified investment*. You will be considered to have disposed of the property at its fair market value (FMV) at the time of the contribution. If the FMV is more than the cost of the property, you will have to report the capital gain on your income tax return. However, if the cost is more than the FMV, the resulting capital loss cannot be claimed. The amount of the contribution will be equal to the FMV of the property. TFSA Dollar LimitAs the account holder, you are the only person who can contribute to your TFSA. For 2009, if you are eligible, you can contribute up to $5,000 to your TFSA. After 2009, the annual TFSA dollar limit will be indexed to the inflation rate. The indexed amount will be rounded to the nearest $500. For example, assuming that the inflation rate is 2%, the TFSA dollar limit would remain at $5,000, for 2010 and 2011, but would increase to $5,500 for 2012. 
TFSA Contribution RoomThe TFSA contribution room is made up of:
Based on information provided by the issuers, the Canada Revenue Agency (CRA) will determine the TFSA contribution room for each eligible individual. Your annual contribution room will be indicated on your notice of assessment. Withdrawals, excluding qualifying transfers, made from your TFSA in the year will be added back to your TFSA contribution room at the beginning of the following year. You cannot contribute more than your TFSA contribution room in a given year, even if you make withdrawals from the account during the year. If you do, you will be subject to a tax equal to 1% of the highest excess amount in the month, for each month you are in an over contribution position. To report any discrepancies in your contribution room limit or excess contributions, please contact your TFSA issuer. source: Canada Revenue Agency, 2009For the complete CRA document regarding TFSA's click here.back to top of Tax Free Savings Accounts
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