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Tax-Free Savings Account

Tax-Free Savings Account (TFSA), or le compte d’épargne libre d’impôt (CELI) in French.

Any Canadian resident who is 18 years and older with a valid social insurance number, can set aside money that can grow tax-free throughout their lifetime. Unlike an RRSP, contributions to a TFSA are not tax deductible. In other words, contributions to a TFSA are made with after-tax dollars. Unlike an RRSP, any income earned in the account (interest, dividend, and capital gains, etc.), as well as the contributions, can be withdrawn tax-free. Any unused TFSA contribution room will accumulate and never expire.

The TFSA program was started in 2009. The federal government set an annual TFSA limit, which was not inflation-indexed, unlike a lot of tax credits. The annual TFSA dollar limit for the years 2009, 2010, 2011 and 2012 was $5,000. The annual TFSA limit for the years 2013 and 2014 was $5,500. The Harper government increased the 2015 annual TFSA dollar limit to $10,000, but the Trudeau Liberal government changed the limit back to $5,500, which will be inflation-indexed and rounded to the nearest $500. So far, inflation has not pushed the limit any higher. For 2017, the annual contribution room is still capped at $5,500.

It should be noted that there is no tax payable on a TFSA account under normal circumstances. Income taxes will be levied, however, on non-qualified investments, prohibited investments, excess contributions, etc.  It’s a very common misunderstanding that the TFSA contribution room is automatically increased by a withdrawal. And no, that’s not the case. As a matter of fact, the TFSA room will not be increased in the same calendar year during which a withdrawal is made. For someone with an unused TFSA contribution room of $10,000 in 2015, if $5,000 is withdrawn during the year and an contribution of $15,000 is made before year-end, the he/she will have a $5,000 excess TFSA amount, on which the tax payer is liable to a tax of 1% per month.

For more information on TFSA, please vist Canada Revenue Agency website.

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