The Tax Free Savings Account was introduced to the 2008 Budget by the Governement of Canada. On Janurary 02, 2009, This program was finanly made available  by Jim Flaherty and Minister of National Revenue and Minister of State (Agriculture) Jean-Pierre Blackburn.

This is an excellent opportunity for individuals make contributions of up to $5000/year without any of the income being subjected to taxation. It’s ment to be a complimentry  savings opportunity to the RRSP (Registered Retirement Savings Plan) and the RESP (Registered Education Savings Plan). But it can also be a good way of saving for variouse significant planned goals and expenses like a new car, down payment on a home, or home improvement.

How Does such a plan Differ from an RRSP?

That is a very good question. Well, there are many ways in which the two differ.

1) TFSA is not tax-deductable but it is completely exempt from taxation upon withdrawn. However, RRSP is tax-deductable but it’s added to a person’s income and then taxed at regular rates.

2)RRSP is ment to be used as Savings opportunity towards retirenment. A TFSA can be uses for pretty much any type of goal that starts from complimenting an RRSP or an RESP to saving up for a new home, vehicle  to being used as funds to start up a personal business. 

3)A TFSA has no minimum Withdrawl like an RRSP. An RRSP is converted to income vehicle as soon as the plan holder turns 71.

4) There is no Spousal/Common Law TFSA plan. However, individuals an still invest in their spouse or common law partner’s plan, up to the maximum allowance.  Contributions are not attributed back to the individual who provided the funds.

How the Tax-Free Savings Account Works

• Canadian residents age 18 or older can contribute up to $5,000 annually to a TFSA.
• 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.
• Choose from a wide range of investment options such as mutual 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.

Stay Tuned. I will go over the many factors to consider before picking the perfect TFSA plan for you!!

For additional info please check out  the Governement of Canada’s TFSA Website.