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New tax-free savings account (TFSA) - March 2009
E-Newsletter - (PDF Format)

New Tax-Free Savings Account (TFSA)

This year, the federal government announced the introduction of a new vehicle to help Canadians save money: the Tax-Free Savings Account (TFSA). Effective January 1st, 2009 every Canadian 18 years and over will have the right to set aside a maximum of $5,000 per year into their TFSA account. This new savings vehicle represents the ideal rainy day account and an excellent way to save up for large purchases!

The TFSA, when used with Registered Education Savings Plan (RESP) and Registered Retirement Savings Plan (RRSP), represents an important way Canadians can save for future expenses and reduce their long-term income taxes. However, there are differences. Unlike RRSPs, amounts put into the TFSA are after tax so cannot be deducted from income. Also unlike RRSPs, any amounts taken out of the TFSA do not need to be added to your income making the TFSA truly like a normal bank account. Furthermore, any unused contribution room can be carried forward and any withdrawn amounts can be put back into the TFSA without reducing contribution room!

Interest, capital gains, dividends, and other income generated within the TFSA account is 100% tax-free. Furthermore, the broad range of investment choices eligible for the TFSA includes guaranteed investment certificates (GICs), mutual funds, other securities, and high-interest savings accounts. Companies such as Manulife are even offering special introductory rates on their Tax-Free Advantage Account (3.50% to March 31st, 2009) and cashable GICs (3.7%) to encourage people to start benefiting from TFSAs. By using this vehicle, Canadians can save tens of thousands of dollars or more in taxes over their lifetime. For example, a middle-income earner contributing $200 per month for 20 years can save $11,045 more than in an unregistered savings account (see chart below). That is $11,045 in savings that can go towards anything the owner of the accounts wants; without restrictions!

To find out how much you can save, try the TFSA calculator found here.