Browse Working With Client

24.4.5 Tax-free Savings Accounts

Learn about Tax-Free Savings Accounts (TFSAs), including basic rules, taxation, qualified investments, contributions, and withdrawals. Discover how they can fit into your financial planning.

Introduction to Tax-free Savings Accounts (TFSAs)

A Tax-Free Savings Account (TFSA) is a versatile savings vehicle established by the Canadian government in 2009. This account allows the holder to earn investment income tax-free throughout their lifetime. It offers complete flexibility with respect to the timing and the purpose of withdrawals. However, there are annual limits to the amount that can be contributed.

Basic Tax-Free Savings Account Rules

  • Eligibility: Any resident of Canada who is at least 18 years old can open a TFSA, regardless of employment status.
  • Source of Contributions: Contributions to a TFSA can come from any source such as tax refunds, gifts, bequests, savings, or earnings from employment or business.

Taxation of a Tax-Free Savings Account

  • Non-Deductible Contributions: Contributions to a TFSA are not tax-deductible.
  • Tax-Free Earnings: Investment income earned within the TFSA (interest, dividends, capital gains, etc.) is not subject to taxes, neither in the year it is earned nor when it is withdrawn.

Qualified TFSA Investments

TFSAs can be used to hold a wide variety of investments such as:

  • Guaranteed Investment Certificates (GICs)
  • Savings Accounts
  • Stocks
  • Bonds
  • Mutual Funds

TFSA Contributions

  • Annual Contribution Limit: Each year, the Canadian Revenue Agency (CRA) specifies the maximum dollar amount that can be contributed. Unused contribution room from previous years can be carried forward indefinitely and any withdrawals from the TFSA free up contribution room for subsequent years.

Table 24.8 | Tax-Free Savings Account Annual Contribution Limit (2009–2020)

Year Contribution Limit
2009–2012 $5,000
2013–2014 $5,500
2015 $10,000
2016–2018 $5,500
2019–2020 $6,000
Total $69,500
  • Excess Contributions: Contributions beyond the allowable limit are penalized at 1% per month on the excess amount.

Example of TFSA Contribution Room

If a Canadian who was 18 years old in 2009 has never contributed to a TFSA, then by 2020 their total contribution room would be $69,500. Alternatively, a person who turned 18 in 2016 would have an allowable contribution room of $28,500 by 2020.

TFSA Withdrawals

  • Timing and Amount: Withdrawals from a TFSA are completely flexible and tax-free.
  • Re-contribution: Amounts withdrawn can be re-contributed starting in the following calendar year, unless the investor has enough unused contribution room to cover the re-contribution in the same year.

Example of TFSA Withdrawal and Re-contribution

Emma, who has $14,000 of unused contribution room, and Liam, who has exhausted his contribution limit, each withdraw $10,000 from their TFSAs in January. Emma can re-contribute her $10,000 any time within the year because she had adequate unused room. Liam has to wait until the next year to re-contribute due to lack of available room.

Uses of a TFSA

Due to its flexibility, a TFSA can serve in meeting various financial needs during different stages of life including:

  • Tuition fees or student loans
  • Wedding expenses
  • Holidays
  • Purchasing a car
  • Making a down payment on a house

Moreover, TFSAs provide excellent opportunities to build emergency funds or grow one’s estate.

Glossary

  • CRA (Canada Revenue Agency): The government body responsible for tax collection and enforcement of tax laws in Canada.
  • Contribution Room: The maximum amount that can be contributed to a TFSA in any given year without incurring taxes on excess contributions.
  • Qualified Investments: Types of investments that comply with TFSA regulations, allowing them to be held within the account.

Key Takeaways

  1. TFSAs offer tax-free investment income and flexible withdrawal options.
  2. Any Canadian resident aged 18 or older can open a TFSA and make contributions from a variety of sources.
  3. The annual contribution limit changes; unused contribution room can be carried forward indefinitely.
  4. Withdrawals are tax-free and amounts withdrawn can be re-contributed in subsequent years, accommodating various life expenses and stages.
  5. It’s essential to track and manage contributions to avoid penalties on excess amounts.

Frequently Asked Questions (FAQs)

Q: Can a non-resident of Canada contribute to a TFSA?

A: No, only residents of Canada who are 18 or older can contribute to a TFSA.

Q: What happens if I over-contribute to my TFSA?

A: Any contributions over your limit will be taxed at 1% of the excess amount for each month it remains in the account.

Q: Is there a penalty for withdrawing money from a TFSA?

A: No, there are no penalties or taxes on withdrawals from a TFSA.

Q: What kinds of investments can I hold in a TFSA?

A: TFSAs can hold a variety of investments including savings accounts, GICs, stocks, bonds, and mutual funds.

Q: Can contributions to my TFSA be tax-deductible?

A: No, contributions to a TFSA are not tax-deductible.


CSC® Exams Practice Questions

📚✨ CSC Exam Questions ✨📚

Welcome to the Knowledge Checkpoint! You'll find 10 carefully curated CSC exam practice questions designed to reinforce the key concepts covered. These questions will help you gauge your grasp of the material, identify areas that need further review, and ensure you're on the right track towards mastering the content for the Canadian Securities certification exams. Take your time, think critically, and use these quizzes as a tool to enhance your learning journey. 📘✨

Good luck!

## What is the primary feature of a Tax-Free Savings Account (TFSA)? - [ ] Contributions are tax-deductible - [ ] Withdrawals are taxed - [x] Income earned within the account is not taxed - [ ] Only retirees can open a TFSA > **Explanation:** The primary feature of a TFSA is that any income earned within the account, whether it is interest, dividends, or capital gains, is not taxed. ## Who is eligible to open a TFSA in Canada? - [ ] Only employed individuals - [ ] Only individuals over 65 - [ ] Only individuals with children - [x] Any resident of Canada who is at least 18 years old > **Explanation:** Any resident of Canada who is at least 18 years old, regardless of employment status, can open a TFSA. ## Which of the following is NOT a qualified investment for a TFSA? - [ ] GICs - [ ] Bonds - [ ] Mutual funds - [x] Real estate properties > **Explanation:** Qualified investments for a TFSA include GICs, savings accounts, stocks, bonds, and mutual funds. Real estate properties are not eligible for TFSA investment. ## What happens if you contribute more than your TFSA limit for the year? - [ ] Nothing, there is no penalty - [ ] You forfeit any excess amount - [x] The excess contribution is taxed at 1% each month - [ ] The excess amount is transferred to the next year's limit > **Explanation:** Any contribution amount over the limit is taxed at the rate of 1% of the excess contribution every month. ## Can you withdraw from your TFSA without penalty? - [ ] Yes, but only after age 65 - [ ] No, there is a withdrawal penalty - [x] Yes, at any time without penalty or tax - [ ] Yes, but only for specific reasons like education or home purchase > **Explanation:** Withdrawals can be made from a TFSA at any time, with no penalties or taxes imposed on the amount withdrawn. ## How is unused contribution room in a TFSA handled? - [x] It gets carried forward to future years - [ ] It gets forfeited at the end of the year - [ ] It gets transferred to a RRSP - [ ] It can only be used for specific investments > **Explanation:** Unused contribution room gets carried forward to future years, adding to the contribution limit for those years. ## As of 2020, what is the total maximum contribution room for someone who was 18 years old or older in 2009 and has never contributed to a TFSA? - [ ] $50,500 - [ ] $45,000 - [ ] $100,000 - [x] $69,500 > **Explanation:** Any Canadian who was 18 years old or older in 2009 and has never contributed to a TFSA had contribution room of $69,500 in 2020. ## If an individual withdraws from their TFSA, when can they re-contribute the withdrawn amount? - [ ] In the same calendar year, regardless of contribution room - [ ] Only after five years - [x] In the next calendar year unless there is unused contribution room in the current year - [ ] They cannot re-contribute the withdrawn amount > **Explanation:** The funds can be replaced in the same calendar year if there is unused contribution room available; otherwise, they can be replaced in the next calendar year without affecting that year’s contribution limit. ## How is the annual contribution room for each eligible taxpayer determined in a TFSA? - [ ] By the individual's employer - [ ] By the provincial government - [ ] By the financial institution where the TFSA is held - [x] By the Canada Revenue Agency (CRA) > **Explanation:** The Canada Revenue Agency (CRA) determines the annual contribution room for each eligible taxpayer and that amount appears on the taxpayer’s online CRA profile. ## In the given scenario, who can re-contribute $10,000 to their TFSA within the same year of the withdrawal: Emma, with $14,000 unused contribution room, or Liam, with no contribution room left? - [ ] Both Emma and Liam - [x] Only Emma - [ ] Neither Emma nor Liam - [ ] Only Liam > **Explanation:** Emma has room to re-contribute the full amount because she had $14,000 in contribution room prior to her withdrawal, whereas Liam must wait until next year to re-contribute as he had no contribution room left when he withdrew the $10,000.

📢
Exciting News!

🚀 Launch Date: April 14th

🎉 Now On App Store!

📱 Available on iPhone and iPad

📚 Master the CSC® Exam with our top ranked iOS app! Packed with thousands of sample questions, it's your perfect study companion for acing the Canadian Securities Course Certification exams!

🎯 Achieve Your Professional Goals with ease. Try it now and take the first step towards success!

🌟 CSC Exam Questions 🌟

Download Today!

Sunday, July 21, 2024