TFSA Guidelines
The details governing Tax-Free Savings Accounts are set out in the Federal Income Tax Act and are administered by the Canada Revenue Agency (CRA). Below we have summarized the key aspects you should know.
Eligibility
You may open a TFSA if you are a Canadian resident who has reached age 18.
Note: The age of majority is 19 for residents of Newfoundland and Labrador, New Brunswick, Nova Scotia, British Columbia, Northwest Territories, Yukon and Nunavut, which may delay the opening of a TFSA. However, the accumulation of contribution room will start at age 18.
TFSAs may not be opened as joint accounts—government rules permit only individual accounts. And, as a registered account, a TFSA cannot be opened under a business name.
Annual Contributions
The 2009 contribution limit is $5,000. This annual limit will rise along with inflation in future years, in $500 increments. You can make contributions anytime during the year. Additionally, there is no lifetime limit on the amount of your TFSA contributions. And, you are not required to have earned income to accumulate contribution room.
The CRA will track your contribution room. The CRA intends to report this amount to individuals on their Notice of Assessment and through the “My Account” function on the CRA web site.
Carry-forwards
If you can't make your maximum contribution one year, you can make up that portion of the contribution in later years by carrying it forward. There is no limit on how much contribution room you can accumulate.
For example, if you contribute $3,000 to your TFSA in 2009, your contribution room for 2010 will be $7,000 ($2,000 carried forward from 2009 plus $5,000 for 2010).
The amount of your unused contribution room is shown on your federal Notice of Assessment.
Over-Contributing to Your TFSA
If you make a TFSA contribution beyond the maximum allowable amount it is considered an over-contribution. The Canada Revenue Agency (CRA) will assess a penalty of 1% per month on your excess contribution.
Withdrawals
You can withdraw money from your account at any time, for any purpose. The timing of withdrawal may depend on what you invested in – for example, non-Redeemable GICs must be held until maturity. Withdrawals can be made tax-free and will not be added to your income for the year.
Transfers between TFSAs
You may open as many TFSAs as you wish, as long as you adhere to your contribution limit. You are free to transfer your TFSAs between financial institutions at any time without being subject to tax, although there may be a transfer out or other fees. You can also move some or all of your money between eligible investments within your TFSA.
Effect on Government Benefits
Investment income earned and the amount of TFSA withdrawals are not included as income for tax purposes, which means that they will not affect your eligibility for Federal income–tested government benefits and tax credits such as Old Age Security (OAS) or the Goods and Services Tax (GST) credit.
Losses in a TFSA
As investment income and capital gains within a TFSA are not taxed, any capital losses generated in the account can't be used against taxable gains outside the account
Separation or Divorce
TFSA assets may be transferred between spouses or common-law partners upon marriage or relationship breakdown. However, it's important to understand the implications of transferring TFSA funds; the spouse who gives some or all of their TFSA funds (due to the divorce/separation agreement) will lose his or her TFSA accumulation room that they've acquired since the launch of TFSA because the transferred amount will not be added back to contribution room.
On the other hand, if a plan holder withdraws assets from the TFSA before giving the funds (due to the divorce/separation agreement), then the amount of the withdrawal will be added back to the contribution room of the transferring spouse for the following year, allowing the plan holder to continue to benefit from tax-free investing. The receiving spouse will be able to contribute to their TFSA, but only to the extent that they have their own contribution room.
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Information about the Tax-Free Savings Account is based on what is currently available from the Canadian government and can be subject to change.
† Amounts are indexed for inflation.
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