The New Tax Free Savings Account (TFSA) – How Does It Work?

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The proposed TFSA is a registered savings account that allows taxpayers to earn investment income tax-free inside the account. Contributions to the account are not deductible for tax purposes, and withdrawals of contributions and earnings from the account are not taxable. The February 26, 2008 Budget proposed that this starts January 1, 2009.

What Is This TFSA?

Yves Thivierge and Julie Galibois (from Quebec) have jointly written a nice little summary in Deloitte’s Tax Breaks – April 2008 Newsletter … and it’s worth the read.

See the section titled .. Is the TFSA for you?

Contribution and withdrawal

Starting in 2009, individuals 18 years of age and older who are resident in Canada may contribute a maximum of $5,000 to a TFSA each year. This amount will be indexed as of 2010 and rounded to the nearest $500. Unused contribution room can be carried forward to future years. Accumulated amounts may be withdrawn from the TFSA as needed and at any time. The tax benefit will not be lost if an amount is withdrawn from a TFSA because the individual will gain contribution room equal to the withdrawal, making a TFSA much more flexible than an RRSP where the contribution room is lost.

Let’s look at an example of how it works (disregarding indexation). If you contribute $2,000 to a TFSA in 2009, your contribution room for 2010 will rise to $8,000 ($5,000 in 2010 and $5,000 minus $2,000 from 2009). A few years later, say in 2016, you withdraw $35,000 from the TFSA to buy a car. You can then contribute $35,000 to your TFSA because you gain back contribution room equal to the withdrawal without affecting your annual contribution room.

…. read the rest of the article.. ..

If you prefer to read it from the “horse’s mouth” .. check out Canada Revenue Agency – Tax Free Savings Account section

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