Published November 19, 2019
A Tax-Free Saving Account (TFSA) is a type of an investment account where Canadian’s do not have to pay any kind of tax on any capital gain, deposit, dividend, and interest earned. There is no need to pay tax even on withdrawal also.
Tax-Free Saving Account can be opened by anybody in Canada who is or more than 18 years old. The account holder can use it for any purpose they want to use.
It was introduced in 2009 in Canada to encourage people to save money with a deposit limit of $5000 per year which was later raised to $5,500 in 2018 and $6,000 limit in 2019 as of now. There is also a limit called Lifetime Limit which means you cannot deposit more than this limit in your lifetime. Currently, the limit is $63,500 in 2019.
No Tax can be charged on any income earned from the investment in TFSA which is the main benefit of TFSA. To understand this benefit, let us show the difference between a person who is investing in a Normal Saving Account and another in Tax-Free Saving Accounts. Suppose both two people invested an amount of $10,000 in Normal Saving Account and Tax-Free Saving Account respectively. After a year, Both earned an interest of $700 at the rate of 7% per annum. The first person who invested in a Normal Saving Account will have to pay tax on $700 which is extra income gained as interest. But the second person who invested in TFSA will have not to pay any tax as he/she will be exempted from the tax penalty.
One can deposit any financial instruments such as bonds, real estate investments, stocks, guaranteed investment certificates, exchange-traded funds along with your saving accounts. It is very convenient to withdraw anytime from the TFSA account without any lock-in period. The Deposit made into the TFSA is also not tax-deductible.
TFSA Contributions
If an individual has not made any contribution to the TFSA in any year, then they can carry forward those uncontributed amounts to next year along with the contribution of the current year. In this way, every person can make use of the benefit of TFSA sooner or later at any year they wish to do so. However, this benefit of TFSA is not available for Non-Resident Canadians.
TFSA Withdrawals
Any person who is withdrawing money from the TFSA will be able to later add it back to the account the same year or the next, according to the TFSA Contribution room left for that person in that year. A person can only contribute up to the maximum deposit limit in the current year and if they withdraw any money from TFSA, then they will have to wait for next year to replenish their current year’s withdrawal as they have no limit left for the deposit in the current year.
Over-Contribution and Total TFSA Contribution Limit
Total TFSA Contribution will mainly include three parts and that is, first, TFSA Deposit Limit for that year, then second is, any contribution that was not used in previous years and finally third is, any withdrawal that has been made in previous years. If anybody is depositing more than the total of these three, then it is called Over Contribution. There will be a charge of 1 percent on over-contribution in TFSA by Canada Revenue Agency until the money is withdrawn.
Death of a TFSA holder
In case of the death of a TFSA Holder, then all the money deposited will be transferred to the nominee, which may be the spouse or children of the account holder usually. The transferred amount will be tax-free for the designated beneficiary also.
The post What is Tax-Free Savings Account? appeared first on Native News Online.
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