The Tax-Free Savings Account (TFSA) program began in 2009. It is a way for individuals who are 18 and older and who have a valid social insurance number to set money aside tax-free throughout their lifetime.
Contributions to a TFSA are not deductible for income tax purposes. Any amount contributed as well as any income earned in the account (for example, investment income and capital gains) is generally tax-free, even when it is withdrawn. Administrative or other fees in relation to TFSA and any interest or money borrowed to contribute to a TFSA are not deductible.
A person determined to be a non-resident of Canada for income tax purposes can hold a valid SIN and be allowed to open a TFSA, however, any contributions made while a non-resident will be subject to a 1 per cent tax for each month the contribution stays in the account.
You can have more than one TFSA at any given time, but the total amount you contribute to all your TFSAs cannot be more than your available TFSA contribution room for that year.
Generally, interest, dividends, or capital gains earned on investments in a TFSA are not taxable either while held in the account or when withdrawn.
There are, however, certain circumstances under which one or more taxes may be payable with respect to a TFSA. The following sections provide information and examples of when and how these taxes are payable, and by whom.
Normally, in most TFSA situations, there is no tax payable, and therefore, a TFSA return is not required; however, where one or more of TFSA taxes are applicable a TFSA return is required must be filled out and sent by June 30, of the year following the calendar year in which the tax arose.
There are three types of TFSAs that can be offered: a deposit; an annuity contract; and an arrangement in trust. Banks, insurance companies, credit unions and trust companies can all issue TFSAs. For more information about a certain type of TFSA, contact a TFSA issuer.
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 different types of investments. For more information, contact a TFSA issuer.
Be aware of these rules and restrictions
You can contribute up to your TFSA contribution room. A tax applies to all contributions exceeding your TFSA contribution room.
Withdrawals will be added to your TFSA contribution room at the beginning of the following year.
You can replace the amount of the withdrawal in the same year only if you have available TFSA contribution room. Direct transfers must be completed by your financial institution.
To open a TFSA, you must do the following
Contact your financial institution, credit union, or insurance company (issuer); and provide the issuer with your social insurance number and date of birth so the issuer can register your qualifying arrangement as a TFSA. Your issuer may ask for supporting documents. If you do not provide this information or provide incorrect information to your issuer, the registration of your TFSA may be denied. If your TFSA is not registered, any income that is earned will have to be reported on your income tax return.
Your federal income-tested benefits and credits such as: old age security (OAS) benefits, the guaranteed income supplement (GIS), or employment insurance (EI) benefits will not be reduced as a result of the income you earn in your TFSA or the amount you withdraw from your TFSA.
The income earned in the account or amounts withdrawn from a TFSA will also not affect your eligibility for federal credits, such as the Canada child tax benefit (CCTB), the working income tax benefit (WITB), the goods and services tax/harmonized sales tax credit (GST/HST), or the age amount.
You can withdraw money from the TFSA at any time, for any reason, with no tax consequences, and without affecting your eligibility for federal income-tested benefits and credits. More information is available online at http://www.cra-arc.gc.ca/tfsa.