Chan's Personal Blog

Canadians are being encouraged to save for life's big events, not just retirement, with the introduction of the Tax-Free Savings Account (TFSA) in the 2008 Budget. Starting in 2009, Canadians aged 18 and older can contribute up to $5,000 annually (from their taxable income) to a TFSA. The investment income, including capital gains, earned in a TFSA will not be taxed -- even when withdrawn. The plan also allows an investor to withdraw funds from the TFSA at any time and for any purpose.

"You can use the plan to save for a special purpose -- a down payment on a house or to buy a car," said Scott. "It provides an incentive to put money away for that purpose (and) you get the tax break of not having to pay tax on the income that's earned on it while you're saving."

As an example, an individual contributing $200 a month to a TFSA for 20 years, at a 5.5 per cent rate of return, will earn about $11,045 more in savings than if the investment had been made in a taxable savings vehicle (unregistered account). [...]

How the Tax-Free Savings Account Will Work

• Starting in 2009, Canadian residents age 18 or older will be eligible to contribute up to $5,000 annually to a TFSA, with unused room being carried forward.
• Contributions will not be deductible.
• Capital gains and other investment income earned in a TFSA will not be taxed.
• Withdrawals will be tax-free.
• Neither income earned within a TFSA nor withdrawals from it will affect eligibility for federal income-tested benefits and credits.
• Withdrawals will create contribution room for future savings.
• Contributions to a spouse's or common-law partner's TFSA will be allowed, and TFSA assets will be transferable to the TFSA of a spouse or common-law partner upon death.
• Qualified investments include all arm's-length Registered Retirement Savings Plan (RRSP) qualified investments.
• The $5,000 annual contribution limit will be indexed to inflation in $500 increments.