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Tax Free Savings Account for Individuals

Tax-Free Savings Account (TFSA) for Individuals

A Tax-Free Savings Account is a new way for residents of Canada to set money aside, tax-free, throughout their lifetimes.

Contributions to a TFSA and the interest on money borrowed to invest in a TFSA are not tax deductible. The income generated in the TFSA is tax-free when withdrawn.

Any individual (other than a trust) who is at least 18 years old, who is a resident of Canada and has a valid Social Insurance Number (SIN) can be a holder of a TFSA.

You cannot contribute to a TFSA until you turn 18. However, when you turn 18, you will be able to contribute up to $5,000 because this amount will not be prorated.

You set up a TFSA through a bank, credit union or other financial service provider who is eligible to issue a TFSA. They are referred to as the issuer of the plan.

As the TFSA holder, you will need to provide your social insurance number (SIN) and date of birth to the issuer, so that the issuer can register your qualifying arrangement as a TFSA. Failing to provide this information or providing incorrect information may cause the registration of the TFSA to be denied, resulting in possible tax consequences.

You can have more than one TFSA at the same time, as long as the total amount of all contributions during the year does not exceed your TFSA contribution room for that year.

Self-directed TFSA

You can set up a self-directed TFSA if you prefer to build and manage your own investment portfolio by buying and selling a variety of different types of investments.

Criteria for contributing to a TFSA

In order to contribute to a TFSA, you must be at least 18 years old, a resident of Canada and have a valid social insurance number (SIN) at the time your Tax-Free Savings Account is opened. You are then a TFSA holder.

As the account holder, you are the only person who can contribute to your TFSA.

As long as you are eligible, you can contribute to a TFSA. You don't need employment income to accumulate TFSA contribution room.

You can give your spouse or common-law partner money to contribute to a TFSA without that money being attributed back to you. However, all contributions they make to their TFSA must not exceed their

The TFSA contribution room is made up of:

TFSA contribution room accumulates every year that you are 18 or older and a resident of Canada throughout the year. You do not have to set up a TFSA to earn contribution room.

Based on information provided by the issuers, the Canada Revenue Agency (CRA) will determine the TFSA contribution room for each eligible individual. Your annual contribution room will be indicated on your notice of assessment.

Any dollar limit from the current year that you do not use will be added to your TFSA contribution room for the next year.

Withdrawals, excluding qualifying transfers, made from your TFSA in the year will be added back to your TFSA contribution room at the beginning of the following year.

You can contribute to a TFSA without filing a tax return. However, the CRA will not provide you with a TFSA room limit as this amount is shown on your notice of assessment when you file a return. You should keep track of your room limit to ensure you do not contribute more than your TFSA room.

(Assuming no indexing) In 2009, Carl is allowed to contribute $5,000. He contributed $2,000 for that year.

2009 TFSA dollar limit: .................$5,000
2009 contributions:.................. - $2,000
unused TFSA contribution room
available for future years ........ .... $3,000

In 2010, Carl does not contribute to his TFSA, but makes a $1,000 eligible withdrawal from his account.

2009 unused TFSA contribution room ......$3,000
2010 TFSA dollar limit........................ + $5,000
2010 unused TFSA contribution room
available for future years.......................$8,000

Carl's unused TFSA contribution room for 2011

2010 unused TFSA contribution room
available from previous year...................$8,000
2010 eligible withdrawal .....................+ $1,000
2011 TFSA dollar limit........................ + $5,000
2011 TFSA contribution room ..............$ 14,000

You cannot contribute more than your TFSA contribution room in a given year, even if you make withdrawals from the account during the year. If you do so, you will be subject to a tax equal to 1% of the highest excess amount in the month, for each month you are in an overcontribution position.

In 2009, Sarah invests $5,000 in a TFSA. Later that year, she withdraws $3,000 for a trip to Europe. Unfortunately, her plans change and she cannot go. Since Sarah has no unused TFSA contribution room left, she will have to wait until the beginning of 2010 to deposit the $3,000 in her TFSA. If she does so earlier, she will have overcontributed to her TFSA and will be charged a monthly tax of 1% on the overcontributed amount.

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