The number of people that do not understand the rules of their Tax Free Savings Account (TFSA) is staggering.  The name itself can definitely be misleading to many. Your TFSA is a registered investment account with tax free status.  Remember any growth in the TFSA is tax free and as well when you withdraw money from the TFSA it is tax free. 

Every person in Canada once they turn 18 has TFSA contribution room.  Currently the limit added for the year 2017 is $5,500.  The Federal government has changed the limit over the years and this has affected the total maximum contribution limit.  The TFSA accounts were introduced in 2009 – currently if you have never contributed to your TFSA and you were 18 or older in 2009 your maximum limit up to and including 2017 would be $52,000.

Just like your RRSP your TFSA can hold many different investments including guaranteed investment certificates (GICs), bonds, stocks or mutual funds, or just a high Interest savings account for liquidity.  Make sure to put the appropriate investment for you into your TFSA, so that you can get the most growth and save the most taxes. Unlike RRSP contribution room you can put TFSA funds you remove back in in January the following year, plus whatever the next years’ limit is.

Watch out for the 1% monthly penalty that is imposed by Revenue Canada for over-contributing to your TFSA.  It is extremely important to track your contributions and your withdrawals from your TFSA.  You are responsible for managing this account yourself.  Contributions and withdrawals are reported to Revenue Canada by each financial institution at the end of each year.  The government is slow to calculate your TFSA room because of this.  Therefore you often do not know you are in a penalty position until the following year.

Another KEY issue is to make sure you have named a beneficiary – children, other family members or a successor holder if you have a spouse.  The benefit to naming your spouse as a successor holder is that their account will then be able to rollover to the surviving spouse’s TFSA and maintain its tax free status.  Any other beneficiary receives the proceeds from the TFSA tax free and then going forward any income derived from that money is then considered to be taxable. 

Remember any growth in the TFSA is tax free and as well when you withdraw money from the TFSA it is tax free.  It is important to mention that when you put money into your TFSA if you are selling registered assets (RRSPs, RRIFs) or non-registered investments, you will incur tax implications prior to putting the money into your TFSA.  The TFSA is another tool in your financial planning tool box.

Deb, Gary & Kelly 

P.S. Knowledge is valuable and will help you avoid mistakes that could potentially be costly.