“The Tax Free Savings Account (TFSA) is an important investment vehicle for Canadians looking to save money and minimize their taxes,” says Lee Anne Davies, head, Retirement Strategies, RBC®. Whether you have newly arrived in Canada or have been here for some time, we all have dreams or goals that we want to achieve. The Tax-Free Savings Account (TFSA) can help you meet some of your financial goals such as buying your first car, home or saving for a family vacation.
The following are quick facts about the TFSA:
- Whatever you are saving for, it will help you save the taxes.
- Eligible Canadians can contribute up to $5,000 every year in a TFSA.
- Contributions will not be deductible for income tax purposes, but investment income, including capital gains, earned in a TFSA will not be taxed, even when withdrawn.
- You don’t require earned income.
- Unused TFSA contribution room can be carried forward to future years.
- Contributions are not deductible for income tax purposes
- Funds can be withdrawn for any purpose at any time (depending on what you invested in).
- The amount withdrawn will be added to unused contribution room and can be re-contributed starting the following year.
- Neither income earned nor withdrawals will affect your eligibility for federal income tested benefits and credits, such as Old Age Security.
- • Giving money to your spouse or common-law partner to contribute to their TFSA will not be subject to the income attribution rules – i.e. there are no tax consequences to either you or your spouse as long as the money remains in a TFSA.
Differences between an RRSP and a TFSA:
While an RRSP is primarily intended for retirement, the TFSA is intended for use as needed. Both plans offer tax advantages, but they have key differences:
- Contributions to an RRSP are deductible and reduce your income for tax purposes. In contrast, TFSA contributions will not be tax deductible.
- Withdrawals from an RRSP are added to your income and taxed at current rates. TFSA withdrawals and growth within the account will not be taxed.
- TFSA withdrawals will not result in lost contribution room.
- With a TFSA you don’t need earned income to accumulate contribution room.
- There is no requirement to convert the TFSA to an income payment option (i.e. RRIF) at any age.
“The TFSA is a perfect complement to an RRSP and we recommend both to minimize taxes,” says Davies. “For those not able to maximize RRSP and TFSA contributions, consider contributing to an RRSP and using the tax refund to start a TFSA.”
How you use a TFSA depends on your own personal needs and goals. For more information on the TFSA please visit your nearest RBC branch, call 1-866-756-1107or visit: www.rbc.com/newtfsa. For more information on other RBC products and services for newcomers to Canada, please visit rbc.com/canada