Tax Free Savings Accounts TFSA’S

What is a TFSA and how does it work?

Tax Free Savings Accounts's were introduced in the 2008 Federal Government Budget. TFSA's allow you contribute and invest TAX FREE within rules set out by the Federal Government.You can take money out and pay zero income tax when you retire! They really got going on January 2009. Often misunderstood as just for savings with low interest returns they really are best used to save and invest in your more risky parts of your portfolio. Very useful to accumulate significant wealth while working. Should be one of the cornerstones of your retirement plan either short term or long term.

Most financial institutions offer low interest rate TFSA's providing 2% to 3.5% interest. We prefer to invest then generate 8% to 12% returns from First and Second Mortgages. Or ETF's such as Wealth Simple aggressive growth portfolio that routinely generate rates of return in the region of 9% to 11%

TFSAs are probably the last amazing gift the federal government will give us. They are always short of cash and looking for ways to put their hand in our back pockets. Many financial institutions encourage you to use these accounts to hold interest based savings investments such as cash, high yield savings and GIC’s. Everyone in your local bank branch has a sales quota don’t be enticed by that nice smiling face encouraging you to misuse the greatest gift the federal government have ever given savers; to put your low interest cash savings in a TFSA. If you understand these basics of TFSA’s then you can come out ahead. I’ve seen folks with $263,000 in their TFSA’s – they used them for aggressive high risk investments in inversed hedged ETF's. TFSA’s are best used for longer term investments.

What is the TFSA contribution limit for 2019?

The TFSA contribution Limit for 2019 is $6,000

What Can I Invest in a TFSA?

You can hold most types of investments in a TFSA. You can hold your own Mortgage, Stocks, Bonds, Mutual Funds, Segregated funds, GIF’s Guaranteed Income Funds, and ETF’s are allowed. Not many Financial Institutions or Accountants know how to set you up to invest in your own mortgage. If you call us we will show you how to do this.

Can I earn Interest in a TFSA?

You can earn interest in a TFSA. Personally I would use the TFSA for other investments that product much better growth and income

How many TFSA's can I have?

You can have several TFSA's as long as the total contributions don't exceed your contribution limits

How much can I put in my TFSA if I have never contributed?

The cumulative contribution room is $57,500 provided you were 18 years old the year they were started. Or you turn 27 in 2018

How much can you have in a TFSA?

Theoretically there is no limit on how much you can grow your TFSA. However Canada Revenue Agency might investigate you if you grow your $63,500 into millions. CRA recently investigated some day traders operating a business within the confines of a TFSA and decided to apply taxes as they were deemed to be abusing the intention of the accounts. We advise you to be judicious if you have significant investment growth strategies in your TFSA

TFSA RULES

TFSA Contribution Rules

1. As of January 1st 2019 the cumulative contribution room is $63,500
2. As of January 1st 2018 the cumulative TFSA contribution room is $57,500
3. As of Dec 31, the 2017 the cumulative TFSA contribution room is $52,000
4. 2018 TFSA contribution room is $5,500, 2017 TFSA contribution room is $5,550, 2016 TFSA contribution room is $5,500
5. Capital gains realised from a contribution to a TFSA are taxed by CRA
6. Capital losses realised from a TFSA contribution are not allowable as a deduction
7. Penalties for over contribution amounts are taxed at the rate of 1% per month
   
8. Interest on money borrowed to contribute then invest in a TFSA is not tax deductible

Your life time contribution room accumulates and is carried over even if you do not open a TFSA, or file an income tax and benefit return. As of 2018 you can contribute $57,500

The following TFSA contribution amounts were approved by our government since they were fist started in 2009: Contribution amounts in each year were as follows 2009-$5000, 2010-$5000, 2011-$5000, 2012-$5000, 2013-$5500, 2014-$5500, 2015-$10000, 2016-$5500 , 2017-$5500, 2018-$5500, 2019 - $6000

TFSA Withdrawal Rules

1. All Interest Income, Dividends and Capital Gains are not taxable within a TFSA
   
2. Capital losses are not deductible within a TFSA
3. All withdrawals are tax free
4. Do not re contribute the same year you make a withdrawal or you pay 1% per month interest penalties
5. You can take any amount out of your TFSA then re contribute next calendar year the amount you withdrew + the new year’s contribution $ amount. If you accumulate $250,000 in your TFSA you can withdraw $250,000. This increases your contribution room to $250,000 + the new years contribution of $5500

TFSA Strategies

1. If you can contribute $458.33 per month, $5,500 per year or use the $57,500 life time contribution to use up all of your contribution room
2. It’s always best to leave your TFSA to your spouse or partner as a successor holder (the full $ amount + gains from time of death roll over to your spouse’s TFSA account –completely tax free) Your spouse becomes the TFSA account holder, bypasses probate tax and bypassing your estate
3. Beneficiaries and estates receive the full $ amount tax free but pay tax on any gains from the time of death to disposition
4. Unless your employer has an RRSP matching contribution plan-it’s worth contributing to your TFSA first
   
5. Hold investments not cash in your TFSA to maximise your benefits
6. You can always withdraw from your TFSA to contribute to an RRSP. Then re contribute your tax refund in the following calendar year to your TFSA instead of blowing it on a trip or stuff
7. You should borrow to contribute to your TFSA if you can generate returns greater that 8%. Interest is not tax deductible.
8. Consider using your TFSA to generate tax free income and use a a flow through arrangement. There are ways to flow income through TFSA's that don't require any income tax
9. TFSA's are fantastic for long term investing then drawing retirement income
10. Make regular withdrawals to triple or quadruple your contribution room
11. Make regular contributions or re contribute
12. Dont use for day trading or running an options business to accumulate millions, CRA will tax you as a business