Articles

A Wealth of Choices: Understanding the New Tax-Free Savings Account

First Posted: April 16, 2008

Benefits and Drawbacks In a Nutshell

1. Tax-free compounded growth and withdrawals. Contributions are made with after-tax money.


2. Withdrawals won't affect income-tested benefits such as the child tax benefit, GST credit, age credit, or Old Age Security payments or supplements;


3. No upper age or lifetime limit for contributions. If you don't contribute for 25 years and then receive a $100,000 inheritance, you could conceivably shield that entire amount from taxes.


4. Unused contribution room is carried forward indefinitely and withdrawals can be replaced later without penalty or having to create additional contribution room. Unlike an RRSP, withdrawals will be added back to accrued contribution room. So, if you don't use your $5,000 contribution room for five years, your accumulated room will build up to $25,000. If you contributed the maximum in the first year and withdrew $1,000 in the fifth year, your contribution room in the sixth year would total $26,000 ($5,000 times six minus $5,000 plus $1,000).


5. You don't need earnings to make annual contributions.

1. Interest paid to borrow money to contribute to a TFSA isn't tax deductible;


2. Over-contributions are subject to a penalty of one per cent a month, the same as RRSPs, and


3. Capital gains (or losses) accrued in a TFSA won't be available to offset gains/losses outside it. Contribution limits will be calculated on the annual Notice of Assessment you receive from Canada Revenue Agency (CRA).