Tax Free Savings Acounts (TFSA)

[DavidB]

Hi, folks.

I came across mention of TFSA's the other day and it got me curious. What exactly are they?

Anybody in these forums know more about them? Can anybody just open an account and say they want it to be a TFSA? Are there any restrictions? How do they differ from an RRSP?

(I am going to do some additional research on my own, but it would be good to have the info also posted in these forums.)

 

[Kreskin]

They will be registered accounts, like RRSPs, but different tax rules. Everyone will have a $5000 annual limit. Unusued room is carry fowarded. If you take money out in the future that amount is added to your future room.

In a nutshell you can put up to 5k per year into an investment account where all earnings are tax free. No tax for interest, dividends or capital gains. You don't get a tax deduction putting it in but you're rewarded with no tax when widthrawn.

I believe they officially launch January 9 and can be bought at any financial institution in Canada. You can invest the funds just as you would in any other investment vehicle.

Anyone who wants to keep money non-registered for any purpose should maximize the use of this product. RRSP's and TSFA's both have advantages and both should be incorporated or reviewed for consideration by each investor. You can put money into each.

 

[SirJosephPorter]

I have already opened my account (and for my wife). My financial advisor at ScotiaMcLeod contacted me a couple of weeks ago about it. They are already setting up accounts, to go into effect on 1st January.

I am 58 years old, and it won’t benefit me all that much. However, I wish they had this in place 20 or 30 years ago. For a young person, this is a great tax saving vehicle. If he/she contributes 5000 $ per year diligently, they can build up huge tax free amounts in 25 or 30 years.

If you don’t have cash to put in the account, I am sure you can transfer existing investments (stock, mutual funds, GIC etc.) into the account. Since the amount you put in is not tax deductible, it won’t trigger any capital gain or capital loss (as it would if you were to transfer investments into an RRSP).

I think it is a great savings vehicle, with a potential of huge tax saving in the long run, I think everybody should have one. There really is no excuse for not having one. Unlike RRSP, this account does not depend upon you having an earned income. Even if you are retired and are no longer working, you can still put 5000 $ per year into the account. It is just that if you are old, the account won’t benefit you much, if you are young, it will benefit you hugely.

 

[Kreskin]

You will need to sign new documents in January because the government hasn't created the documentation yet and it won't work like a TSFA until then.

 

[SirJosephPorter]

You will need to sign new documents in January because the government hasn't created the documentation yet and it won't work like a TSFA until then.

I assume ScotiaMcLeod will send me the appropriate documents in the mail. But they have done all the paperwork on their part and are ready to go.

 

[tracy]

It sounds like the Roth IRAs here in the US. Is there an income limit on the TSFAs?

 

[SirJosephPorter]

It sounds like the Roth IRAs here in the US. Is there an income limit on the TSFAs?

Tracy, it is exactly like Roth IRA in USA. Are you an American? By income limit, if you mean if it is related to your income, it is not. Anybody can put 5000 $ per year in the account, even if you are unemployed, on welfare, or retired, and have no income.

 

[Kreskin]

What people will need to watch is their limit, which will be provided on a one year lag via the notice of assessment. For example if after two years I take out the 10k I've put in I will be able to replace it the following year but not in the same year. Penalties will be applied like RSP's for overcontributions.

SJR, the investment industry is in a bit of marketing mode right now. There really isn't a way to set up an account right now that isn't just creating another account-type that already exists. It will certainly be considered a disposition when the time comes and if there is taxable income/gains between now and then it will apply. I doubt the account number could stay the same when they officially launch.

 

[SirJosephPorter]

It will certainly be considered a disposition when the time comes and if there is taxable income/gains between now and then it will apply.

Kreskin, I am not sure about that, we will see. However, currently you are allowed to move investments from one account to another account (provided neither are RRSP accounts) without any disposition.

e.g. if I want to transfer my IBM shares from my TD Waterhouse account to my ScotiaMcLeod account, there is no disposition, I can physically transfer the shares and not trigger any capital gain/loss. I don’t see why a TFSA would work differently. Since the money put into the account is after tax money, my guess is that you could transfer investments into the account without any disposition. But we will see how it works.

As to setting up the account right away, I am only repeating what my advisor told me, that they have already set up the accounts for their investors.

 

[tracy]

Tracy, it is exactly like Roth IRA in USA. Are you an American? By income limit, if you mean if it is related to your income, it is not. Anybody can put 5000 $ per year in the account, even if you are unemployed, on welfare, or retired, and have no income.

I'm Canadian, but live in the US. I openned a Roth IRA acount last year, but the Roth accounts have an upper income limit. For singles, if you make more than around 114K or something, you are inelligible to contribute.

 

[Kreskin]

It's like moving funds into an rsp. Even if you transfer the shares you are considered to have disposed of them.

I've heard a lot of stories out there and advisors are opening accounts, but the government hasn't provided anyone with the means to do it. No biggie, just everyone will have to go back in and do it all over.

 

[SirJosephPorter]

I'm Canadian, but live in the US. I openned a Roth IRA acount last year, but the Roth accounts have an upper income limit. For singles, if you make more than around 114K or something, you are inelligible to contribute.

Tracy, I lived in USA for eight years, in the seventies. I enjoyed living there (I lived in Salt Lake City, Ann Arbor and Cincinnati), but I think Canada is the better place to live than USA. I certainly prefer Canada to USA.

 

[tracy]

Tracy, I lived in USA for eight years, in the seventies. I enjoyed living there (I lived in Salt Lake City, Ann Arbor and Cincinnati), but I think Canada is the better place to live than USA. I certainly prefer Canada to USA.

I moved here for work and now it would be hard to leave even though I do miss home. For me as a youngish single woman, California is a great place to live. Canada will still be there if I decide I want to have some babies...

 

[darkbeaver]

I moved here for work and now it would be hard to leave even though I do miss home. For me as a youngish single woman, California is a great place to live. Canada will still be there if I decide I want to have some babies...

Tracy, don't count on it, you better get home and have those babies now. What are you waiting for?

 

[SirJosephPorter]

I moved here for work and now it would be hard to leave even though I do miss home. For me as a youngish single woman, California is a great place to live. Canada will still be there if I decide I want to have some babies...

Quite so. I also happen to think that Canada is a much better place to bring up babies than USA.

Our son was born in Britain (we lived in UK for eight years as well). When he was two years old we decided to move back to Canada. I found a job while in Britain, my employer paid for our moving expenses from Britain to Canada and we were back in Canada within six months. I think Canada is also a better place than UK to bring up kids. Even today, our son holds a dual citizenship, British and Canadian.

Well, that was 22 years ago and looking back, we made a very good decision in returning to Canada. I think Canada is the best country in the world to live in (even with Harper as the PM).

 

[tracy]

Tracy, don't count on it, you better get home and have those babies now. What are you waiting for?

I'm waiting for the urge to have babies to kick in. I don't know if or when that will happen. Until then, I'm perfectly happy here with my doggie.

 

[DavidB]

Actually, my wife and I would consider TFSA's for our children (3, 4, and 7). We are pretty conscientious about saving their money from the $100/month child allowance, birthday gifts, etc. (our children have more cash saved up than my wife and I). Could we open TFSA accounts in the names of our children?

 

[SirJosephPorter]

Actually, my wife and I would consider TFSA's for our children (3, 4, and 7). We are pretty conscientious about saving their money from the $100/month child allowance, birthday gifts, etc. (our children have more cash saved up than my wife and I). Could we open TFSA accounts in the names of our children?

I know kids can have an RRSP account, my son has had one since the age of 10. My wife is a doctor and self employed. She hired our son to enter the OHIP billing into the computer and paid him the market wages. As a result, he had RRSP room available and has been putting money into RRSP since the age of ten.

So I assume it should also be possible to open a TFSA for children.

 

[Kreskin]

The account owner has to be 18+ and it can only be opened in single names.

 

[mit]

I think calling these savings accounts Tax Free is not true - These are not RRSP accounts - You have already paid taxes on your money that you put in the account. Here is another secret - Unless you have enough interest income to warrant a bank generated tax form - the government is not going to bother you with paying more tax on it. More Flatulence from the man from Oshawa/Ottawa