The Facts behind a Tax Free Savings Account

The Canadian government has really gotten behind the Tax-Free Savings account with an ambitious educational campaign. You can view their latest press release here. the introduction of the TFSA The Tax-Free savings has been called “the single most important personal savings vehicle since the introduction of the Registered Retirement Savings Plan (RRSP)”. These accounts are truly an opportunity and shouldn’t be passed up.

How does at Tax-Free Savings account work?

The TFSA is similar in scope to an RRSPs. Your contributions are made with after-tax dollars but when you make a withdrawal you aren’t taxed. However there is an interesting difference. Any withdrawal from the TFSA account creates an equal amount of contribution room. This provides the opportunity to save for a car, a vacation, whatever your heart’s desire in a tax-smart manner, and even replace the savings in the future.

Something else worth noting; earnings within the account and withdrawals do not have an affect on income-tested benefits. This would include Canada Child Tax Benefit or Guaranteed Income Supplement.

Another great feature of the TFSA is that earnings within the account and withdrawals do not affect income-tested benefits such as the Old Age Security or GST credits. A TFSA is really a win win situation regardless of whether you’re in the low-income bracket or a higher earner.

The bare bones explanation?

The TFSA investment is simple. Every Canadian resident who is at least 18 years old can contribute up to $5,000 per year (indexed to inflation) to a TFSA. Any income earned inside the TFSA is totally tax free, even when withdrawn from the TFSA.


The major difference between an RRSP and a TFSA ? 
The RRSP is like having an interest-free loan from the government, but a loan that eventually has to be repaid. 
A TFSA results in a complete avoidance of tax – not just a deferral. You can make withdrawals from your TFSA for any reason, however this does defeat the purpose. And it’s a disadvantage. It’s far better to keep some sort of injection of money going into your TFSA so you’ll be able to earn that tax free return each year.

What kind of investments should you consider with a TFSA? Interest income is always a good start, bonds and debentures. Interest is the form of investment income that is usually taxed at the highest rate, so this form of income within a TFSA is an automatic choice.

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