In the 2008 federal budget the government introduced a new savings vehicle that will allow Canadians to save money on a tax-exempt basis. The Tax Free Savings Account (TFSA) will come into effect in 2009 and is available to anyone who is at least 18 years old and with the additional requirement of having a social insurance number.
While there will not be a limit as to how many TFSAs you can set up, there is a limit to the contribution amount. Your TFSA contribution room will begin to accumulate in 2009; each person who meets the age requirement will begin to accumulate $5,000 of TFSA contribution room. This accumulated contribution room will be cumulative and carried forward to future years. Contributions are made from after tax dollars so they will not be eligible for tax deductibility from income as is they case with RRSPs. However, any money invested along with income and gains held in a TFSA won’t be taxed while being held inside a TFSA or when being withdrawn. When funds are withdrawn from your TFSA, these amounts will be added to your contribution room for the following year. For instance, by the end of year 3 you could have $15,000 plus any interest and gains in your TFSA; then in year 4 you decide to withdraw $6,000 dollars, this amount you have now taken from your TFSA can be recontributed at a future date. Perhaps in year 5 you want to invest the maximum amount available, you will now be able to contribute the $5,000 for the current year plus the $6,000 you withdrew in year 4. If in any given year you contribute less than the $5,000 maximum, again the unused room is carried forward indefinitely to future years.
The government declared all withdrawls from a TFSA will not be considered income, therefore they will have no impact on gvernment benefits or credits such as GIS or OAS, or on the Child Tax Benefit or Goods and Services Tax Credit. Howevr, one thing to keep in mind is that any excess contributions beyond the TFSA contribution limit will be taxed at one percent per month.
You will be able to invest in essentially the same list of investments permitted for investment in RRSPs, including stocks, bonds, mutual funds, etc. When it comes to borrowing to invest in a TFSA, you won’t be able to write off any interest expense on funds borrowed since all income and withdrawls are non-taxable.