Tax-Free Savings Account – TFSA
Tax-Free Savings Account (TFSA), first introduced by the Canadian Government in 2009, provides an option for non-taxable savings accounts. My opinion is that this would be an excellent option for people of all ages and income levels. There’s no matter what your income is, avoiding income taxes should be everyone‘s goal.
To accept something, it’s always best to first understand it to avoid any misunderstandings. It would help me explain TFSA in a little more detail and some issues people run into (they pay the penalty because they do not know much about the program‘s rules and restrictions).
What’s so great about Tax-Free Savings Accounts (TFSA):
- The deposited amount does not reduce the amount of taxes you pay for the current year; however, later on, the deposited amount and the income received, such as interest, capital appreciation, dividends, and capital gains, will not be taxed upon withdrawal.
- An individual who is at least 18 years old can contribute to such a plan. An increase from $5,500 to $6,000 has occurred since 2019. TFSA contribution limits were increased from $5,500 to $10,000 in 2015 but were again lowered to $5,500 in 2016.
An interesting fact:
It is essential not to exceed the allowed contribution limit; between 2009 and 2012, the maximum contribution was $5,000. Since 2013, the Government has increased the contribution limit for additional contributions by $500. Therefore, the contribution limit in 2013 and 2014 was $5,500.
Additional contributions have increased in 2015 to $10,000, and they have decreased in 2016, 2017 and 2018. Therefore, in 2016, 2017, and 2018, you can invest up to $5,500 into TFSA every year.
The TFSA contribution limit for 2019, 2020 and 2021 is $6,000 each year.
Your contribution limit per person in 2021 is 75,500 if you have not contributed to the TFSA before. (if the person has not contributed to the TFSA since 2009)
- It must be an individual account:–There may not be any joint accounts because the tax shelter benefits are determined individually based on the individual taxpayer’s SIN.
- Any money withdrawn from a TFSA does not constitute income or affect the assistance a low-income family may receive from government programs. (for example, Child Tax Benefit, GST credit, the Age Credit, the Old Age Security and Guaranteed Income Supplement – GIS benefits).
- The remainder of your contributions can be made any later year if you don’t contribute the full annual amount at that time. The allowance for deposits carries forward in the same way as an RRSP.
- You can redeposit the amounts you took out of the TFSA without affecting the room available in the TFSA in the future. You must pay attention to the TFSA contribution limit each year and the TFSA contribution limits total. If you have a small balance within your TFSA account, you can withdraw it and deposit it back at any time during the year. If you continuously contribute the maximum amount to this account, you have to be careful when you withdraw and deposit money back during the same calendar year.
- You can invest in a TFSA account the same way as you do in an RRSP.
As you are not taxed on TFSA income, TFSA can also be used to save for short-term expenditures, such as home purchases, automobiles, vacations, etc.
At the beginning of even a young professional’s career, TFSA can be even more appealing than RRSP because the income may be relatively low, but the program may yield quite a large return.
It is all great, but some people forget or decide not to consider that deposits should not exceed the allowed limit. The excess amount of investment will be penalized at 1% per month if you have gone over the allowed limit. Many received a letter from CRA in 2011 regarding a penalty that had accumulated on their accounts.
Let’s look at what we should never do:
- Many financial institutions allow you to open a TFSA, but there is a limit to the amount that you may invest. A unique form needs to be filled out if you would like to transfer such an account from one institution to another. Suppose you withdraw money from your TFSA account without proper documentation and deposit it into another TFSA account. It may result in penalties if it is considered to be two deposits in the same year.
You should pay close attention to the process of depositing money into a TFSA and withdrawing it. For example, if you contribute nothing to this account until 2021, your maximum allowable limit is $75,500. If you deposit $6,000, withdraw it in two months and redeposit the same amount after one month (all transactions over one calendar year), you are within limits. The deposits will be recorded at $12,000. This is still less than the total allowed for this year.
In contrast, if you use the maximum amount every year and perform the same operation as described above, then you will have to pay penalties since the previous years’ amount has already been used. In the current year, you will exceed the limit of $6,000 by these transactions. As a result, you will be penalized with a penalty of $60 per month, which may amount to quite a bit.
TFSA Limits from 2009 to 2021
Total Room $75,500
Deposits into TFSA can be in the form of investments or guarantees. If we talk about guaranteed investments, we can currently open an account with interest higher than the big banks offer without locking your money.
Pankaj Bhatia learned an lt about TFSA and helped you achieve long term and short term financial goals. As mentioned above, TFSA income doesn’t impact your taxes; all the earnings are Tax-free. In Canada, TFSA is blessed for those who understand taxes on income.
Visit Pankajbhatia.ca or call Pankaj Bhatia at 647 640 2222 to book an appointment for a consultation on TFSA.