News & Notices

Tax-Free Savings Account cumulative contribution limit hits $36,500 in 2015

Posted: January 13, 2015

by Tim Weichel

The Tax-Free Savings Account (TFSA) is a flexible, registered, general-purpose savings vehicle that allows Canadians to earn tax-free investment income to more easily meet lifetime savings needs. The TFSA complements existing registered savings plans like the Registered Retirement Savings Plans (RRSP) and the Registered Education Savings Plans (RESP).
How the Tax-Free Savings Account Works
• As of January 1, 2013, Canadian residents, age 18 and older, can contribute up to $5,500 annually to a TFSA. If you were at least 18 years old in 2009, then your cumulative TFSA contribution limit as of 2015 is $36,500.
• Investment income earned in a TFSA is tax-free.
• Withdrawals from a TFSA are tax-free.
• Unused TFSA contribution room is carried forward and accumulates in future years.
• Full amount of withdrawals can be put back into the TFSA in future years. Re-contributing in the same year may result in an over-contribution amount which would be subject to a penalty tax.
• Choose from a wide range of investment options such as segregated funds, Guaranteed Investment Certificates (GICs) and bonds.
• Contributions are not tax-deductible.
• Neither income earned within a TFSA nor withdrawals from it affect eligibility for federal income-tested benefits and credits, such as Old Age Security, the Guaranteed Income Supplement, and the Canada Child Tax Benefit.
• Funds can be given to a spouse or common-law partner for them to invest in their TFSA.
• TFSA assets can generally be transferred to a spouse or common-law partner upon death.
Scenario:
Gillian saves $3,000 a year for 10 years in a TFSA and earns investment income on those savings. She decides to start a small business and withdraws her TFSA savings, which have accumulated to $40,000, with no tax consequences. Gillian runs her business for 10 years and then sells it. With the proceeds from the sale, Gillian decides to re-contribute to her TFSA the $40,000 she withdrew from it 10 years ago. She may do so without reducing her other available contribution room.
Watch Investments Grow Tax-Free
Whatever investments you choose in your TFSA, you can watch these investments grow tax-free. For example, an individual contributing $200 a month to a TFSA for 20 years (assuming an average annual return of 5.5 percent) will accumulate about $11,045 more in savings than if the investment had been made in a taxable savings vehicle. Here is a calculator where you can enter your own figures to compare TFSA vs. regular savings.
What are some of the differences between a TFSA and an RRSP?
• An RRSP is primarily intended for retirement savings. Tax assistance provided by a TFSA complements that provided through RRSPs.
• RRSP contributions are tax-deductible while RRSP withdrawals are added to income and taxed at regular rates.
• TFSA contributions are not tax-deductible but the contributions and the investment earnings are exempt from tax upon withdrawal.
• Unlike an RRSP, which must be converted to a retirement income vehicle at age 71, a TFSA does not have any minimum withdrawal requirement.
• There is no TFSA spousal plan. Individuals can provide funds to their spouse or common-law partner to invest in their TFSA, up to the spouse’s or common-law partner’s available room, and the income earned on the contributed amount is generally not attributed back to the spouse or partner who provided the funds.
Consider consulting us before deciding whether to place money in an RRSP or a TFSA or to find out the combination of contributions that is best for your situation.
TFSA and Seniors
The TFSA provides seniors with a tax-efficient savings vehicle to help meet ongoing savings needs, even after they reach age 71 and are required to convert their registered retirement savings into a retirement income vehicle.
Neither the income earned in a TFSA nor withdrawals from it affect eligibility for federal income-tested benefits and credits such as Old Age Security,Guaranteed Income Supplement benefits and the Goods and Services Tax Credit.
Scenario:
François and Evelyn are retired and living comfortably on François’ pension. Evelyn also receives a small pension based on her years of work after raising their children. They would like to save Evelyn’s pension each month and use it to spend the winter in Florida. The TFSA will provide them with an effective means to save for their trip south each year, without paying tax on the interest earned on those savings.
Impact of a TFSA on Federal Income-Tested Benefits and Credits
A TFSA improves savings incentives for low- and modest-income individuals because neither the income earned in a TFSA nor withdrawals from it affect eligibility for federal income-tested benefits and credits, such as the Canada Child Tax Benefit, the GST credit, the Age Credit, Old Age Security and Guaranteed Income Supplement benefits.
Scenario:
Alexandre and Patricia, a modest-income couple, expect to receive the Guaranteed Income Supplement (GIS) in addition to Old Age Security and Canada Pension Plan benefits when they retire. They have saved for a number of years in their TFSA and now earn $2,000 a year in interest income. Neither this income, nor any TFSA withdrawals, will affect the GIS benefits (or any other federal income-tested benefits and credits) they expect to receive. If this $2,000 were earned on an unregistered basis, it would reduce their GIS benefits by $1,000.
• More things to ask us about a TFSA
• Who is eligible?
• How to set-up a TFSA
• Making withdrawals
• Transfers
• Death of a TFSA holder
• Taxation of a TFSA
Call us to find out more, to set up a TFSA, to transfer a TFSA to a more suitable investment, or to decide whether to contribute to a TFSA or an RRSP this year.
Tim Weichel. tim@retireonyourterms.ca 705-798-0062 or 416-230-2703