Canadian Tax-Free Savings Account (TFSA)

Canadian residents always have a goal to save money. Thankfully, they can do it without having to pay tax on the interest it earns. The tax-free savings account (TFSA) allows you to contribute up to $5,000 each year, with $500 increments indexed to inflation.

Keep in mind that the money you contribute is not tax-deductible. In other words, the income earned from any capital gains, interest, dividends, or other investment income within these accounts will be tax-free.

In addition, the savings account will allow you to:

  • Make tax-free withdrawals that add to your contribution room for the next year.
  • Protect any TFSA earnings from affecting any benefits that are based on income.
  • Contribute to a spouse or common law partner’s TFSA.

RRSP vs. TFSA: Saving for the Future

Financial institutions currently issuing RRSPs are also able to issue TFSAs. TFSAs differ from RRSPs, in one important way. Tax benefits on RRSPs usually prevent taking out money until the age of retirement.

More importantly, TFSAs with $5,000 annual contribution limit will not allow you to save enough for retirement. But if you expect that your tax rate will be lower when you retire, RRSPs will actually be better in the long-term.

The tax-free account does present a few advantages in regards to using your RRSPs toward the Home Buyers’ Plan (HBP). This is designed to assist first-time homebuyers with getting money for a down payment. It can also be helpful for those saving toward a second property.

Below is a comparison table between the RRSP HBP and the tax-free savings account:

AvailabilityFirst-time buyersEveryone
Money TaxedUpon withdrawal from RRSP1Before depositing into TFSA
Tax Deductible DepositsYesNo
WithdrawalsMust be paid backNo Need to Repay
Maximum Annual Deposit
(for 2008)
$20,000 (max. 19% of your income)$5,000
Maximum Withdrawal$20,000Unlimited
1. Money withdrawn under the Home Buyers’ Plan is tax-free if repaid in 15 equal yearly instalments.

TFSAs for Major Purchases

TFSAs allow for greater flexibility. Most importantly, they allow tax-free withdrawals, re-contribution at any time, and the accruing of tax-free interest. This makes them ideal for saving up fro a large purchase. For instance, a down payment on a home, a vacation or tuition fees could be current savings goals.

For example: To clarify, contributing $200 per month to a TFSA over 20 years will accumulate about $11,045. Above all, this is more than submitting the same contributions would amount to in an unregistered account.

Tax Free Savings Graph

Notes: Combined federal-provincial tax savings, based on a $200 monthly contribution for 20 years and a 5.5 per cent rate of return. For unregistered savings, a 21 per cent average tax rate on investment income is assumed (based on 40 per cent interest, 30 per cent dividends and 30 per cent capital gains, and a middle-income earning account holder).
Source: Department of Finance Canada

Open a TFSA With Your Mortgage Savings

Perhaps you want to take advantage of the tax-free savings account but don’t currently have the funds to contribute to one. On the other hand, there are options available like refinancing your current mortgage in order to save money.

Super Brokers offers the best interest rates available. With one of our many fixed-rate mortgage products, you could save close to one year’s TFSA contribution limit. Even better, you can begin amassing tax-free earnings.

Savings Account

Note: Amounts expressed in constant dollars and investments assumed to earn a real rate of return of 3.5 percent (5.5 percent nominal minus 2 percent inflation). Tax Savings calculated using an average combined federal-provincial tax rate of 21 percent on investment income, consistent with middle-income earner investing in a balanced portfolio (40 percent interest, 30 percent dividends and 30 percent capital gains).
Source: Department of Finance Canada

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