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How much can I contribute?

The Tax-Free Savings Account annual contribution limit for 2016 is $5,500. The total accumulation limit allowed is therefore $46,500; ($5,000 for each of the first four years, $10,000 for 2015 plus $5,500 for each of 2013, 2014 & 2016). The Federal Government has rolled back the contribution limit for 2016 to $5,500.

Contribution room is cumulative and will be carried forward indefinitely. Unlike the RRSP system, any amount withdrawn from your TFSA in a particular year will be automatically added to your TFSA contribution room for the following year, allowing you to withdraw TFSA funds to re-contribute an equivalent amount in a future year. As with RRSPs, any excess contributions beyond your limit will be taxed at 1% per month.

Who is eligible?

Any Canadian resident who is at least 18 years old will be allowed to open a TFSA. The only requirement is that you have a Social Insurance Number when the account is opened.

How is a TFSA different from an RRSP?

An RRSP is primarily intended for retirement. The TFSA is like an RRSP for everything else in your life. Both plans offer tax advantages, but they have key differences:

  • Contributions to an RRSP are deductible and reduce your income for tax purposes. Contributions to a TFSA will not be tax-deductible; however, the income generated will not be taxed.
  • Withdrawals from an RRSP are added to your income and taxed at your current rate; your TFSA withdrawals and growth within your account will be tax-free.
How will TFSAs be taxed?

Unlike RRSPs, but similar to RESPs, contributions to a TFSA are meant to come from after-tax funds and therefore will not be tax deductible from income. The big advantage is that any income and gains on investments held within a TFSA won't be taxed while inside the TFSA or upon withdrawal.

When should I invest in a TFSA and when should I invest in an RRSP?

While every person's circumstances are unique, a general rule of thumb is if your tax rate is going to be lower when you withdraw the money than when you put it in, contribute to an RRSP. If your tax rate is going to be higher upon withdrawal, use the TFSA. It's best to talk to your financial advisor to discuss your personal circumstances and plan an investment strategy to meet your individual needs.

What are the benefits for seniors?

The TFSA will provide seniors with a tax-free savings vehicle to meet ongoing savings needs, something they have only limited access to once they reach age 71 and are required to begin drawing down their registered retirement savings. Any investment earnings within a TFSA will not affect Old Age Security benefits.

Who will benefit the most from the TFSA?

While the TFSA will have benefits for people of all ages and income levels, there are some distinct situations where the TFSA will be very useful:

  • Young people with a long time frame to compound investment returns
  • Low-income people who save little taxes from RRSP contributions
  • People who have run out of RRSP contribution room
  • Seniors facing clawbacks of social benefits such as Old Age Security or the Guaranteed Income Supplement, or who must collapse their RRSPs at age 71
Can a TFSA be transferred to someone else?

A TFSA plan can be transferred tax-free when you die to your spouse or common-law partner as the "successor account holder". The assets of the plan itself can be transferred regardless of whether the survivor has available contribution room and without reducing the survivor's contribution room.

Is my contribution room tracked?

Yes, the Canada Revenue Agency will track TFSA contribution room when you file your annual income tax return, just as they currently do for your RRSP.

What types of investments can be held in a TFSA?

In general, a TFSA will be permitted to hold the same investments as an RRSP. This will include a broad range of investments such as mutual funds, securities, government and corporate bonds, term deposits and, in certain cases, shares of small business corporations.

What if I borrow to invest in my TFSA?

Since the income earned inside a TFSA along with TFSA withdrawals are non-taxable, you won't be able to write off any interest expense on funds borrowed for the purpose of investing in a TFSA. TFSA assets can be used as collateral, which may help investors obtain secured credit at more favourable rates.

What if I leave Canada?

If you become a non-resident, you can still hold your TFSA and continue to benefit from the tax exemption on investment income and withdrawals. However, no contributions will be permitted nor will TFSA contribution room continue to accrue.

How do I find out if the TFSA is the right choice to meet my investment and savings goals?

Talk to your financial advisor at BlueShore Financial. Your advisor can look at your entire portfolio, take into consideration your personal situation and goals, and recommend specific strategies. Call 604.982.8000 in the Lower Mainland or toll-free at 1.888.713.6728 for more information.