Many Canadians have already taken advantage of the Tax Free Savings Account (TFSA), which was introduced by the government in January 2009. This savings program is available to all Canadian residents age 18 or older with a Social Insurance Number. TFSAs allow Canadians to save money on a tax-exempt basis for any financial goal. It can be long-term such as retirement or a house purchase or short-term such as a car or vacation.

The annual contribution limit began at $5,000 per year for 2009 and will be indexed to inflation and rounded to the nearest $500 in later years. Unused contribution room can be carried forward to future years. It is important not to exceed your annual limit as there is an over-contribution penalty. The Canada Revenue Agency will charge a penalty of 1% per month based on the over-contribution amount.

Unlike a Registered Retirement Savings Plan (RRSP), contributions to a TFSA cannot be deducted for income tax purposes. However, investment income (including capital gains) earned in a TFSA is not subject to tax.

There is no tax payable on withdrawals from your TFSA. Investors can withdraw funds from a TFSA at any time for any purpose and will not be taxed or otherwise penalized. Any amounts withdrawn will be added to your annual contribution room in the following year.

Income earned and withdrawals from a TFSA will not affect your eligibility for government benefits and credits. You have no worries for such benefits as the Canada Child Tax Benefit, Employment Insurance Benefits, Guaranteed Income Supplement, Old Age Security Benefits, Age Credit and Goods and Services Tax Credit.

Individuals can contribute to a spouse’s TFSA. Contributions made by an individual into a spouse’s TFSA are not subject to the income attribution rules (since income earned within the TFSA is not taxable). On death, TFSA assets can be transferred to the surviving spouse or common-law partner without affecting the contribution room of the survivor.

Individuals can transfer investments from an existing non-registered account into a TFSA, just as they can transfer investments from an existing non-registered account into a RRSP. The investments transferred are deemed to have been disposed at fair market value. This may trigger a capital gain or loss which would be reported on an individual’s income tax return.

There is no age requirement for conversion or collapse of your TFSA. You can hold your TFSA until you die regardless of your age. Each year, the government will determine and advise individuals of their TFSA contribution limits for that tax year.

You are free to choose your investment based on your time horizon and risk tolerance. Eligible investments include mutual funds, stocks, bonds and all investments that are currently permitted in RRSPs.

You can see that there are many advantages with the new TFSA. Have you opened your TFSA yet? Contact your trusted financial planner today for more information on how you can begin benefiting from the Tax Free Savings Account.

The foregoing is for general information purposes and is the opinion of the writer. This information is not intended to provide personal advice including, without limitation, investment, financial, legal, accounting or tax advice. Please call or write to Rick Sutherland CLU, CFP, FDS, R.F.P., of FundEX Investments Inc. to discuss your particular circumstances or suggest a topic for future articles, at 613-798-2421 or e-mail rick@invested-interest.ca.