The new Canadian Tax Free Savings Account (TFSA) has been generating a lot of excitement amongst investors and is being lauded as the largest and most significant tax deferrment initiative by the Canadian tax authorities since the launch of the RRSP or Registered Retirement Savings Plan.
Starting in January 2009, Canadian residents who are 18 years of age or older will be able to earn tax-free investment income within a Tax-Free Savings Account (TFSA) during their lifetime.
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Contributions to a TFSA are not deductible for income tax purposes. Also, interest on money borrowed to invest in a TFSA is not tax deductible. However, the income generated in such an account (for example, investment income and capital gains) is tax-free, even when it is withdrawn.
The TFSA dollar limit is $5,000 in 2009, and will be indexed to inflation and rounded to the nearest $500 in later years. Unused TFSA contribution room can be carried forward to later years. The total of TFSA withdrawals in a calendar year is added to the TFSA contribution room for the next calendar year.
In deciding whether or not to set up a Canadian Tax Free Savings Account (TFSA) an investor must consider a number of factors and we recommend consulting with your financial advisor to ascertain the details of your particular situation and its suitability.
Think of the TFSA as a compliment to and not a replacement for an RRSP, consider that you can carry over investing room from year to year so that you can begin later and still get the full benefits. This seems like a minor point but accounting experts have stated that on small amounts such as $5,000 the transaction fees can add up to account for a larger percentage of the total investment amount than on a proportionately larger account size such as $15,000 or more.
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The author's belief is that the TFSA Canadian Tax Free Savings Account is perfectly suited to saving for special projects and other minor investments since there is no tax impact when making withdrawals, as with an RRSP, and the investor can replace the funds with no penalty. We mention special projects because at a rate of $5,000 per year it can take many years before an investor can use this money for any major project such as a major home renovation and the like.
Also, given a choice investors with large debt loads should balance their financial strategies between debt reduction and savings and emphasize debt reduction if the debts are incurred at high interest rates such as with credit cards and other high interest debt. The goal is to save but some debts must be reduced or eliminated before it is worthwhile for an investor to start saving, specially when the debt can grow over time, again as in the case with credit cards.
In closing we repeat that you should always consult your financial advisor to get advice specific to your situation - which tends to be the key to maximizing benefits from various investment strategies as individual situations vary - but on the whole we believe the TFSA is a good program and that Canadian savers and investors should take advantage of it.
 - Information and opinion', '<img src="http://www.allarticles.ca/public/articles/large/canadian_tax_free_savings_account_tfsa.jpg" alt="Canadian Tax Free Savings Account (TFSA) - Information and opinion" style="float: right; margin: 0 0 1em 1em; border: 0;" />Starting in 2009, Canadian residents who are 18 years of age or older will be able to earn tax-free investment income within a Tax-Free Savings Account (TFSA) during their lifetime.', window.location.href, 3))
