Reducing Your Taxes For Dummies
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Canada Revenue Agency gave us all a little gift recently. As of January 2009, you can shelter up to $5,000 a year in investments in a Tax-Free Savings Account (TFSA). The beauty of the TFSA is that you can withdraw cash as needed — and you don’t pay a tax penalty. Here’s what you need to know about the Canadian TSFA in a nutshell:

  • You can start contributing to a TFSA at age 18 — all you need is a Social Insurance Number (SIN).

  • TFSA contribution room accumulates even if you don’t open an account. What that means is that, if you don’t open an account or make a contribution this year, by next year, you’ll have $10,000 in contribution room waiting and so forth.

  • Over-contributions are subject to a penalty tax of 1 percent per month.

  • Eligible investments in a TFSA run the gamut, from daily interest savings accounts to stocks, mutual funds, bonds, GICs, and, in some cases, shares in small business corporations.

  • Income earned in a TFSA, including interest, dividends, or capital gains, isn’t taxable.

  • Unlike any other tax-advantaged savings vehicle, you actually recover contribution room the year after you make a withdrawal.

  • If you die, the fair market value of your TFSA goes into your estate tax free, but any gain or income that builds up afterward is taxable.

  • You can’t currently name a direct beneficiary for a TFSA, but future amendments to provincial laws may allow that.

  • The TFSA is versatile so you can use it in a number of ways:

    • Supplementing tax-sheltered money in RRSPs and Registered Retirement Income Funds (RRIFs)

    • Saving for your child’s education or your own education

    • Accumulating a down payment on a home

    • Keeping an emergency fund

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