Canadian residents over the age of 18 now have a new way to invest: the Tax Free Savings Account (TFSA). You likely know that we can now contribute up to $5000 each year to our TFSAs, which are widely available at financial institutions.
Remember though that the contributions themselves are not tax deductible, but the great thing is that you do not pay tax on interest, dividends, and capital gains earned within the TFSA. Withdrawals, which you can do at ANY time, are tax-free and if you contribute less than your $5000 limit in 2009, you can carry forward the unused contribution room indefinitely!
Be aware that since earnings are tax-free, the interest on money you borrow to contribute to your TFSA will not be deductible for income tax purposes.
Doesn’t this sound great? Here’s a summary of the benefits to you:
• You’ll be able to grow funds faster inside your TFSA because of the tax exemption
• You don’t lose contribution room when you withdraw money since amounts withdrawn are added to your future contribution room
• You can split income by giving money to a spouse or adult family member
• You can contribute to your TFSA after the age of 71 unlike RRSPs
• Your earnings and withdrawals will not have a negative impact on your federal government benefits such as Old Age Security
One great strategy to maximize the benefits of your TFSA is to purchase the stocks that you think have the greatest potential for capital gain—that way, all the gains are tax free!
There are some additional important details regarding marital breakdown, options for non-residents, and in-kind contribution of qualifying investments that I would enjoy speaking with you about.
This is a terrific opportunity to consider, so please call so we can compare your options together!
Heather Holden, PhD
Wealth Advisor, ScotiaMcLeod