Introducing the Tax-Free Savings Account

Customer-owners have a new way to save money with the Tax-Free Savings Account (TFSA). You can save or invest money without paying tax on the income it earns and you also can withdraw it tax-free. Caisse populaire de Clare offers you six different TFSA products, all at competitive rates, for a lifetime of savings needs. Choose from:

• TFSA High Interest Savings Account
• TFSA 1-year Term Deposit
• TFSA 2-year Term Deposit
• TFSA 3-year Term Deposit
• TFSA 4-year Term Deposit
• TFSA 5-year Term Deposit

Call us today or come to one of our branches to open a TFSA.

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The biggest treat for investors in the 2008 Federal Budget was the introduction of a new savings vehicle. This will allow Canadians to save money, not just for retirement but for any purpose and on a tax-exempt basis. On  June 18, 2008, the Government of Canada passed legislation to introduce the Tax-Free Savings Account (TFSA). Since 2009 Canadians can make a TFSA, one of the most important personal savings and tax initiatives in Canada  history.

Customer-owners will have a new way to save money starting January 2009, with the introduction of the Tax-Free Savings Account. The TFSA was introduced by the Government of Canada in the 2008 Budget. The account will allow you to save or invest money without paying tax on the income it earns. You can also withdraw the money tax free. Canadians now have flexible account options for a lifetime of savings needs.

To help you better understand the TFSA better, we've put together some  Frequently Asked Questions. This information is based on measures announced in the 2008 Federal government budget on February 26, 2008. It was then passed into legislation on June 18th 2008. We will keep updating this site as more information becomes available from the government.
Here is a link to the government’s TFSA calculator to help you see how much money you could save. And if you want to get a head start on saving contact us. 
 
Who do I contact for more information?

• Caisse populaire is preparing to be able to offer the Tax-Free Savings Account to you effective January 1, 2009. Since the Tax-Free Savings Account is not officially available until January 2009, we may not have all the answers yet. But we'll tell you what we know so far.
• Visit www.caissepopclare.com often for up-to-date information. You can also visit your nearest branch or phone us. 

What is the Tax Free Savings Account?

The TFSA is a registered savings account that allows taxpayers to earn investment income tax-free inside the account. Contributions to the account are not deductible for tax purposes. Also, withdrawals of contributions and earnings from the account are not taxable.
TFSA savings can be used for a variety of needs. For example: to purchase a new car, renovate a house, start a small business or take a family vacation.

When will it be available?

The Government of Canada proposes the TFSA will be available January 1, 2009.

Who is eligible to open a TFSA?

Individuals who are residents of Canada and 19 years of age or older are eligible to establish a TFSA. The only requirement will be that the individual must have a Social Insurance Number when the account is opened. There will be no limit on how many TFSAs each person can set up. But keep in mind that the allowable yearly tax-free contribution is a combined total of all of these accounts.

How would I know what my TFSA contribution room is for a given tax year?

The Canada Revenue Agency (CRA) will determine TFSA contribution room based on information provided by issuers. They will determine the TFSA contribution for each eligible individual who files an annual T1 individual income tax return.
Individuals who have not filed returns for prior years because for example, there was no tax payable. These individuals would be permitted to establish their entitlement to contribution room by filing a return for those years. These individuals will also be permitted to file a tax return by any other means acceptable to the CRA.  

If I don't have money to invest each year, could I use any unused contribution room in a future year?

Yes, the 2008 budget proposes no limit on the number of years unused contribution room could be carried forward. 

How much can you contribute to a TFSA per year?

Each year you could contribute an amount up to your contribution room for the year. The TFSA contribution room will be determined by CRA for each eligible individual who files an annual income tax return. 
Your contribution room would be made up of three amounts:

• First: Each year you would be allocated and allowed to contribute at least $5,000. This annual amount will be indexed to inflation and rounded to the nearest $500 on a yearly basis.
• Second: Any withdrawals made during the year would be added to the contribution room for the next year.
• Third: Any unused contribution room from the previous year would be added to the contribution room for the year.

For example (assuming no indexing):

• In 2009 you would be allocated and allowed to contribute up to $5,000. If you only contribute $2,000, an amount of $3,000 would be carried forward to 2010.
• Your contribution room for 2010 would then be $5,000 plus $3,000, or $8,000.
• If in 2010, you do not contribute but decide to withdraw $1,000, your contribution room for 2011 would be $5,000. You could also contribute $8,000 (carried forward from 2010), plus the $1,000 withdrawn, or $14,000.
  

What is the main benefit of saving in a TFSA?

Capital gains and other investment income earned within a TFSA will not be taxed. An individual contributing $200 a month to a TFSA for 20 years will accumulate about $11,045 more in savings. They will accumulate more in savings than if the investment had been made in a taxable savings vehicle.
Note: Combined federal-provincial tax savings, based on a $200 monthly contribution for 20 years and a 5.5% rate of return. For unregistered savings, a 21% average tax rate on investment income’s assumed. This is based on 40% interest, 30% dividends and 30% capital gains, and a middle-income earning account holder.
 

Would there be any restrictions on withdrawals?

No, you could withdraw any amount in the account for any reason.  

How can the TFSA help me with my savings need through my lifetime?

All Canadians have a reason to save to fulfill important lifetime goals and aspirations.

• As you begin to work, you are able to contribute $100 a month to your TFSA. By age 25, you have accumulated $12,000—enough to purchase your first car for $10,000.
  
• You can continue to save in your TFSA to finance other major purchases. Like a down payment on a new home, home renovations, a child’s wedding, and an RV to enjoy in retirement.
  
• By saving regularly in a TFSA throughout your life, you will be able to finance these purchases. You will accumulate about $135,000 by the time you are 80. This is about $40,000 more than you would have accumulated had you saved on an unregistered basis.

What kind of investments can you hold in a TFSA?

A TFSA would generally be permitted to hold the same investments as a registered retirement savings plan, such as:

• GICs, term deposits, high-interest savings accounts
• Mutual funds
• Shares
• Bonds, debentures, notes, mortgages

Where a TFSA holds a non-qualified investment, a tax of 50% of the FMV of the non-qualified investment is applied.

What kinds of investments are prohibited for the TFSA?

You are not permitted to invest in entities where you do not deal at arm’s length. Where a TFSA holds a prohibited investment, a tax of 50% of the FMV of the prohibited investment is applied.

What if I contribute excess amounts in my TFSA?

Like an RRSP, excess contributions to a TFSA will be subject to a 1% per month penalty tax until withdrawn.

How will TFSAs be taxed?

The big advantage to the TFSA is that any income and gains on investments held within it won't be taxed. It will not be taxed while held in a TFSA or upon withdrawal, hence the name – Tax-Free Savings Account.

What if I borrow to invest in my TFSA?

The income earned inside a TFSA along with TFSA withdrawals are non-taxable. You won't be able to write off interest expenses on funds borrowed for the purpose of investing in a TFSA.

 
Could I use my TFSA assets as security for a loan?
RRSPs cannot be used as collateral for a loan unless you want your RRSP deregistered and immediately taxed. Unlike RRSPs, Tax-Free Savings Account (TFSA) assets can be used as collateral. This may facilitate investors in obtaining secured credit at more favorable rates.

 
Can I give my spouse or partner funds to contribute to a TFSA?
Normally, the attribution rules contained in the Income Tax Act block attempts at splitting either income or capital gains. This will be split between spouses or partners by attributing such income or gains to the original spouse or partner.
The federal budget indicates that it won't apply to income or gains earned in a TFSA's spouse or partner’s contributions.

What is the effect on income-tested government benefits?

The biggest criticism of the RRSP system is funds withdrawn upon retirement are taxed at the retiree’s marginal tax rate. However, in many cases the withdrawals affect the retiree’s eligibility for income-tested government benefits and credits. These may include the Age Credit, the Guaranteed Income Supplement ( GIS ) or even Old Age Security (OAS) benefits.
The Government of Canada announced that since withdrawals from the TFSA are not considered to be income. They will have no impact on government benefits or credits, such as GIS or OAS, or on the Canada Child.

What happens upon death?

The FMV of the TFSA on the date of death will be received by the estate on a tax-free basis. However, an income or gains accruing after the date of death will be taxable.
Individuals will be able to name a surviving spouse or partner as a successor account holder. In which case the TFSA will continue to be tax-exempt. Alternatively, the TFSA of a deceased individual can be transferred to the TFSA of a surviving spouse or partner.
 

What happens upon separation or divorce?

During a separation, any amount from the TFSA of one partner can be transferred to the TFSA of the other. The amount will be transferred to the TFSA of the other while maintaining the tax-exempt status. Note that the transfer will not re-instate the contribution room of the transferor spouse or partner. It also won't be counted against the contribution room of the transferee spouse or partner.

 
What if you become a non-resident?
If you become a non-resident, you can still hold your TFSA. You can continue to benefit from the tax exemption on investment income and withdrawals, however:
>  no contributions may be made to the TFSA, and
>  TFSA contribution room will not accumulate while you are a non-resident.

How is a TFSA different from a Registered Retirement Savings Plan (RRSP)?

An RRSP is primarily intended for retirement. The TFSA is like an RRSP for everything else in your life. Both plans offer tax advantages, but they have key differences.

• Contributions to an RRSP are deductible and reduce your income for tax purposes. In contrast, your TFSA contributions will not be deductible.
• Withdrawals from an RRSP are added to your income and taxed at current rates. Your TFSA withdrawals and growth within your account will not—they will be tax-free.

While the two plans are meant to be tax neutral, RRSPs will tend to be the better choice. It's better when the tax rate upon withdrawal is expected to be lower than the tax rate upon original contribution. TFSAs make more sense if your tax rate is higher upon ultimate withdrawal than it was when you contributed. This includes the effect of RRSP withdrawals on reduced income-tested benefits.
 
The after-tax rates on TFSA and RRSP savings are equivalent when tax rates are equal during the contribution and withdrawal. The value of the tax deduction for RRSP contributions is equivalent to the value of withdrawal from a TFSA. The rate of return from saving in either a TFSA or an RRSP is superior to unregistered saving.
 

Where can I find more information?

Visit the government website for up-to-date information.