The TFSA was created to shield a portion of investment earnings from tax; have you tried it yet?

By Giselle Pieczonka

Most Canadians are familiar with the tax free savings account benefit, but are they taking advantage of it? If you are a Canadian resident age 18 and over you can contribute to a TFSA. Canadians from all income levels and walks of life can benefit from this product.
TFSA was introduced by the federal government in 2009 as a vehicle which would allow Canadians to set money aside in a product where they can grow their savings tax-free. The new limit for 2013 is $5,500 per person. It has been increased for the first time since inception for this coming year. If an individual has not had an opportunity, or chosen, to invest in a TFSA product, their contribution limit as of January 2013 would be calculated as follows:

2013 $5,500
2012 $5,000
2011 $5,000
2010 $5,000
2009 $5,000
Grand Total: $25,500

The contribution period for the TFSA runs from January to December each year, but if a person does not contribute in a given year or does not put in the full allowable amount, they do not lose their allowable benefit. They can add the unused amount to the next year’s contribution or continue to carry the amounts forward from year to year.

A benefit of the TFSA in comparison to the RRSP is that if a withdrawal or a full redemption is made from a TFSA at any point, the government allows the TFSA holder to re-contribute the money back into a TFSA in the next contribution year. However, where a withdrawal has been made, the holder is not allowed to redeposit into a TFSA in that year if the contribution limit has already been reached.

Penalty imposed

It is important to keep track of your contributions and re-contributions over time because if you over-contribute to a TFSA the current Canada Revenue Agency penalty rate is one per cent per month on the highest excess amount. The penalty rate will continue to apply for as long as the excess amount continues to be in the TFSA. This is similar to the penalty for over-contributions on an RRSP, except that there is no “grace” amount. The penalty applies from the first $1 of over-contribution.

There are many eligible investment vehicles at Canada’s financial institutions. Most institutions offer multiple choices for TFSA investments including a savings account, term deposits, mutual funds or other investment instruments. Depending on what you are saving for – as an example, a new family vehicle in 2014, a child’s wedding in the next year, or that dream trip that may be a few years in the future – the time frame may dictate the type of investment to make based on when you want to redeem your investment.

Why take advantage of a TFSA option? Investing in a TFSA reduces the amount of interest income or capital gains that has to be claimed on your income tax by sheltering the interest amount or capital gain earned in the TFSA vehicle.

Account earnings escape tax

The TFSA differs in this sense from the RRSP: a person placing funds in a tax-free savings account does not receive a tax benefit; they will pay a tax on those funds; but if some or all of that money is withdrawn from the TFSA account it will not be taxed. Further, money earned by your investments within the savings account are shielded from tax; you won’t pay a tax on the interest your savings earn or on a capital gain.

TFSA is intended as an additional savings tool in our overall financial tool kit to help Canadians save for those big expenses or big purchases.
It is always best to discuss your options with a financial expert to ensure you are putting your money into a comparatively beneficial, and suitable investment. There are plenty of investment opportunities on the market, offering many options in whatever type of investment meets your need.

For further information specific to the TFSA and to ensure you are eligible to participate in the TFSA program, you can speak to your financial institution representatives or view the information available online on the government website:

Giselle Pieczonka is manager of retail banking for the Canadian Western Bank, Winnipeg branch.

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