Tax-Free Savings Account (TFSA)

With the Tax-Free Savings Account (TFSA), your clients can put money aside for special projects like buying property, taking a family vacation, or topping up their retirement savings,  and watch their savings grow tax-free. Discover what a TFSA can do for your clients.

Note: Unless otherwise indicated, in this section, the term "spouse" includes legally married partners and common-law partners. 
 

• What is a TFSA and how does it work?
• Death and other tax considerations
• How to make the most of the TFSA
• Representative's Kit
• Client Documentation
   
   

What is a TFSA and how does it work?

The Tax-Free Savings Account (TFSA) is a savings account available to all Canadian residents 18 years of age and up. This account allows them to earn investment income tax-free throughout their lifetime.

TFSA contributions are capped with an annual limit and are not tax-deductible, but withdrawals aren't taxed and that contribution room isn't lost.*

* The contribution room that is freed up after a withdrawal generally becomes available the following year (see TFSA withdrawals).

Choosing an investment type
The following Desjardins Financial Security savings products are TFSA-eligible:

• Guaranteed Investment Certificates (GICs)
• Daily interest funds
• Guaranteed interest funds
• Market-linked term investments*
• Guaranteed investment funds
   

*When offered. Ask about our current campaign.

Who can contribute to a TFSA?
All Canadian residents 18 years of age and up can contribute to a TFSA. Contributions cannot exceed the maximum amount permitted by law. There is no maximum age limit for owning or contributing to a TFSA.

How much can be contributed to a TFSA?

Annual TFSA contribution limit:

• The TFSA contribution limit has been $5,000 a year since it was introduced in 2009.
• The contribution limit will be indexed to the inflation rate and rounded to the nearest $500 every year, where applicable. 
   

Here’s how TFSA contribution room is calculated for a given year:

Annual limit
+ any unused contribution room from the previous year
+ any TFSA withdrawals made in the previous year, excluding qualifying transfers**

Example: In 2010, Jonathan was entitled to contribute $5,000 to his TFSA. He performed the following transactions during the year:

2010	Contributions	Unused contribution room	Withdrawals
March 14	$2,000
September 20	$2,500
December 18			($1,000)
2010 unused contribution room		$500

His 2011 contribution room is calculated as follows:

* This amount does not take indexing into account, where applicable 

Carrying forward unused TFSA contribution room
Since there is no age limit for contributing to a TFSA, any unused contribution room can be carried forward indefinitely to future years.

Excess TFSA contributions
Excess contributions are subject to a penalty tax of 1% per month for each month the excess amount remains in the TFSA.

TFSA withdrawals
Your clients can make withdrawals from their TFSAs at any time* without incurring tax penalties. They do not have to include the TFSA withdrawal in their income for tax purposes. However, depending on the type of investment, certain fees or other contractual rules may apply to withdrawals.

Withdrawals free up an equivalent amount of contribution room the following year.**

* Subject to any conditions that apply to the investments chosen.
**Under certain anti-avoidance rules for TFSAs, withdrawals related to certain types of transactions may not generate additional contribution room. To find out more, please contact the Canada Revenue Agency.

Death and other tax considerations

TFSAs and attribution rules
Unlike with RRSPs, TFSA holders are not allowed to use their contribution room to contribute to their spouse’s TFSA.

However, the attribution rules do not apply to money that is given to a spouse so they can contribute to their own TFSA. Keep in mind that under the attribution rules, the transferor or lender must pay tax on certain income from money transferred or lent to a spouse or minor child. In the case of a TFSA, however, the transferor or lender is not taxed on income earned in their spouse’s TFSA. This allows a couple to contribute to two TFSAs, even if one of the two spouses isn’t earning any income.

Divorce or separation
If, as the result of a divorce or separation, the amounts accumulated in a TFSA must be shared between the ex-spouses, the transfer can occur directly between their TFSAs. This transfer will not affect either person’s contribution room.

TFSA inherited by the surviving spouse
It is not possible to designate a successor holder under a DFS TFSA contract, because the contract ends upon the TFSA holder’s death. However, a spouse who inherits a TFSA may transfer, as a contribution, the payments received from the deceased spouse's TFSA to their own TFSA up to the fair market value of the TFSA at the time of death without reducing their unused TFSA contribution room. To do so, they must complete form RC240 – Designation of an Exempt Contribution Tax-Free Savings Account and send it to the Canada Revenue Agency within 30 days of making the contribution.

Death of a TFSA holder without a surviving spouse
Upon the holder’s death, the TFSA will cease to be tax exempt. In other words, any income generated by the account after the holder’s death will be taxable. However, any income and gains accumulated prior to the holder’s death are not taxable.

Borrowing fees
Borrowing costs incurred to contribute to a TFSA are not tax-deductible.

Investment losses
Any losses on investments held in a TFSA are not tax-deductible.

Using TFSA assets as collateral
Your clients can use the assets held in their TFSAs as collateral for a loan, if required by their financial institution.

Impact of a TFSA on income-tested benefits
Withdrawals do not affect eligibility for tax credits or benefits such Old Age Security, Guaranteed Income Supplement, Canada Child Tax Benefit, GST credit, QST credit, age credits, etc.

How to make the most of the TFSA

During the working years
There is very little opportunity for couples to split income during their working years. TFSAs now provide this option. Both spouses can open a TFSA, even if only one of them has earnings or investments.

Since income attribution rules do not apply to TFSAs, the higher earner can give their spouse the funds they need to contribute to their own TFSA. Over the years, this strategy can provide tax benefits if it helps lower the taxable income of the higher earner.

Keep in mind that under the attribution rules, the transferor or lender—not the TFSA holder—has to pay tax on certain income from monies transferred or lent to the spouse or minor child.

See how Thanh and Kim can use a TFSA to split Thanh's income during his working years

Thanh has an investment of $10,000 earning 6%. His marginal tax rate is 42.4% He wants to invest another $10,000. In the first example, he contributes $5,000 to a TFSA in his name and gives $5,000 to his wife, Kim, which she contributes to her own TFSA. In the second example, he invests $10,000 in another type of investment.

	Example 1			Example 2
Year	Thanh's TFS	Kim's TFSA	Vs.	Other type of investment
2009 contributions	$5,000	$5,000		$10,000
Interest paid	$300	$300		$600
Taxes owed	$0	$0		($254)
2009 year-end balance	$5,300	$5,300		$10,346
2010 contributions	$5,000*	$5,000*		$10,000
Interest paid	$618	$618		$1 221
Taxes owed	$0	$0		($518)
2010 year-end balance	$10,918	10,918		$21,049
Total	$21,836			$21,049
The couple has an additional $788** in their pockets because Thanh gave money to his wife so they could each contribute to a TFSA.

* This amount does not take indexing into account, where applicable.
** The tax saving is $254 + $518 = $772. The difference comes from the interest earned on the money that was not used to pay taxes. Since the interest earned is not taxable, the benefits really add up over the years.

TFSAs and retirement planning
Some types of income splitting are currently possible for retired spouses, depending on their sources of income and their age. And a TFSA is a great option for retirees. A couple that retires before age 65 can immediately benefit from income splitting if they contributed to the TFSA of the spouse with lower retirement income.

See how Rachid and Dyhia made the most of their TFSAs

Neither Rachid nor Dyhia has a pension plan through work. They maximize their RRSP contributions, but since Dyhia makes more than Rachid, she has been able to contribute more to her RRSP and accumulate other assets over time.

Rachid and Dyhia have both decided to retire when they’re in their fifties but understand that they can’t split their income from RRSP benefits until they turn 65.

Dyhia has therefore decided to contribute to a TFSA for herself and to give her husband money so he can contribute to his own TFSA. She gets immediate tax savings on the earnings generated by a portion of her savings.

When they retire, both Rachid and Dyhia will each be able to withdraw the money they need from their TFSAs. Plus, they won’t have to wait until age 65 to benefit from income splitting.

TFSAs and retirees
TFSAs are also a great investment vehicle for retirees who don’t need the entire mandatory  minimum amount they must withdraw from their RRIFs. They can put the portion of the minimum amount they don't need into a TFSA to earn tax-free investment income.

And since investment income drawn from a TFSA is not taken into account when calculating income-tested benefits such as Old Age Security, Guaranteed Income Supplement, age credits, etc., withdrawals from this account will not reduce these benefits or tax credits.

Seeting up a contingency fund
Any good financial planner will recommend that their clients set up and maintain a contingency fund that contains three to six months of income. TFSAs are the ideal vehicle for accumulating these funds.

Individuals who maximize their RRSP contributions
Some workers with employer-sponsored pension plans see their RRSP contribution room limited by their participation in the plan, but they can still increase their retirement income by accumulating savings tax-free in a TFSA.

Individuals unable to make RRSP contributions
In Canada, individuals can only contribute to an RRSP if they are earning income. However, anyone 18 years of age and over can take advantage of the TFSA’s tax-free benefits.

Saving up for major purchases
Whether your clients are planning on taking a trip, buying a car, or saving for a down payment, a wedding, or any other big expense, they can save faster with a TFSA, since they don’t have to pay any tax on the investment income earned in this account.

Representative's Kit

How to choose the best savings plan for your client’s objectives
   3 pages - 21 kb

Profiles of clients interested in TFSAs
   2 pages - 28 kb

Client documentation

Desjardins Financial Security: Registered plans

Savings Outlook: Enhancing your savings strategy with a TFSA (July 2008)
General information on the TFSA. It includes a comparative table outlining key characteristics of TFSAs and RRSPs.
   2 pages - 126 kb

Your RRSP, your TFSA and your projects
   16 pages - 1.2 Mb