Tax Free Savings Account (TFSA)

Starting on January 1, 2009 you'll be able to contribute $5,000 annually to a Tax Free Savings Account (TSFA), as outlined in the 2008 Federal budget.  This new savings account was introduced so that the Conservatives could at least be shown to be partially addressing their 2006 pre-election promise to eliminate capital gains tax when the proceeds are reinvested.

The TFSA is essentially a "tax pre-paid savings plan".  "Pre-paid" refers to the fact that contributions are made with after-tax dollars.  The initial annual TFSA limit is $5,000 and this amount will be adjusted annually to account for inflation.  TFSA limits accumulate annually and savings can be withdrawn from the TFSA and be re-contributed back into the TSFA later on, making them much more flexible than an RRSP.

You should take into account your tax rate while working and when you are retired when deciding between a TFSA and an RRSP.  An RRSP will be more beneficial when the tax rate upon withdrawal is lower than the tax rate upon the initial contribution.  Conversely, a TFSA will be better if your tax rate will be higher upon withdrawal than it was when you contributed; this would include the effect of RRSP withdrawals on benefits such as the Guaranteed Income Supplement or Old Age Security, which are clawed back based on income.  Maximizing both RRSP and TFSA contributions provides the most flexible tax planning opportunities during your working life and during retirement.

A TFSA's growth on investment is protected from tax but a TFSA can only be transferred to a spouse tax-free.  If the TFSA is transferred to the estate, another family member or another entity, that person is responsible for the taxes on the future growth within the TFSA.

A TFSA is a modest but flexible savings vehicle that is an excellent tax-deferment for an individual.  However, if your goal is to have a tax shelter that can be passed on to your heirs, a customized life insurance policy is much more flexible.  We'll be pleased to answer any questions you might have and to design the best solution for you.

John K. Gallagher, CIM, FCSI

Associate Portfolio Manager

Vice President & Director

Direct:            416.369.3188

Toll Free:      800.559.8853 Ext. 3188

E-mail:           jgallagher@fostergroup.ca