A Tax-Free Savings Account is a new way for residents of Canada to set money aside, tax-free, throughout their lifetimes. Contributions to a TFSA and the interest on money borrowed to invest in a TFSA are not tax deductible. The income generated in the TFSA is tax-free when withdrawn.
Who is Eligible?
Any individual (other than a trust) who is at least 18 years old, who is a resident of Canada and has a valid Social Insurance Number (SIN) can be a holder of a TFSA.
What Types of Investments Are Allowed in the TFSA?
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. It will be considered that you have disposed of the property for 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 in 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.
What is the TFSA Dollar Limit?
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.
What is TFSA Contribution Room?
The TFSA contribution room is made up of:
- your annual TFSA dollar limit;
- any unused TFSA contribution room in the previous year; and
- any withdrawals made from the TFSA in the previous year, excluding qualifying transfers.
- 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.
What are Excess Contributions?
If, at any time in a calendar month, there is an excess TFSA amount in your account, you will be subject to a tax of 1% per month on the highest excess amount, for each month that the excess remains in the account.