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NDCU in the Community
"Through careful & ethical stewardship of our members’ resources, financial success is shared by members and the communities that we so strongly support."
NDCU in your Community
NDCU in your Community!

Tax Free Savings Account Intended to help all Canadians save more, the main benefit of the Tax-Free Savings Account (TFSA) is it allows your investments to grow tax-free. Talk to us about your savings needs and let us recommend the best option for you.

Overview of Product Features

Canadian residents who are 18 years of age or older will be able to earn tax-free investment income within a Tax-Free Savings Account (TFSA) during their lifetime.

Contributions to a TFSA are not deductible for income tax purposes and interest on money borrowed to invest in a TFSA is not tax deductible. However, the income generated in such an account (for example, investment income and capital gains) is tax-free, even when it is withdrawn.
The TFSA dollar limit is $5,000 in 2009, and will be indexed to inflation and rounded to the nearest $500 in later years. Unused TFSA contribution room can be carried forward to later years and will show on the members Notice of Assessment.

The total of TFSA withdrawals in a calendar year is added to the TFSA contribution room for the next calendar year.

How the Tax-Free Savings Account Works

Starting in 2009, you’ll be able to contribute $5,000 each year and each year following. You can open a plan if you're a Canadian resident, 18 and older and have filed a tax return.

This means that after 5 years, your contribution room will be $25,000. If you don’t contribute the $5,000 in a particular year, this contribution room can be carried forward to future years – so you can play catch up if needed.

Unlike an RRSP, your contribution to a Tax-Free Savings Account is not tax deductible. However, the interest will not be taxed – so you get to keep what you earn. 
 
You can contribute or withdraw funds at any time and for any reason without incurring taxes or a penalty (Depending on the type of term it is invested in at your financial institution). If you do take money out, you keep that contribution room and can put the money back in the Tax-Free Savings Account as soon as the following year.

NOTE: the holder (the member) is responsible for ensuring the maximum contribution limit is not exceeded. An excess contribution will result in a penalty tax of 1% per month for each month that the excess contribution amount remains in the TFSA.

The Tax-Free Savings Account will not affect your eligibility for income tested benefits, eg. Old Age Supplement, Canada Child Tax Benefit or Guaranteed Income Supplement – members are not penalized for saving.

Tax-Free Savings Account Resources

Canadian Revenue Agency - TFSA website

Tax-Free Savings Account Tool - This TFSA Calculator can help you determine how much you can save: http://www.budget.gc.ca/2008/mm/calc_e.html

Member FAQ

Who do I contact for more information?
Nelson & District Credit Union (NDCU) offers the Tax-Free Savings Account effective January 1, 2009.
 
Not sure how the TFSA fits into your financial plan? Our knowledgeable and experienced financial guides can help. Visit your nearest branch or phone us:

What is the Tax-Free Savings Account?
The TFSA is a registered savings account that allows taxpayers to earn investment income tax-free inside the account. Contributions to the account are not deductible for tax purposes, and withdrawals of contributions and earnings from the account are not taxable. TFSA savings can be used for a variety of needs, for example: to purchase a new car, renovate a house, start a small business or take a family vacation.
 
When will it be available?
The Government of Canada proposes the TFSA will be available January 1, 2009.
How do I find out if the TFSA is the right choice to meet my investment and savings goals?
Talk to your financial advisor at Nelson & District Credit Union. Your advisor can look at your entire portfolio; take into consideration your personal situation and goals, and recommend specific strategies. 

Who is eligible to open a TFSA?
Any individual (other than a trust) who is a resident of Canada and 18 years of age or older would be eligible to establish a TFSA. The only requirement will be that the individual must have a Social Insurance Number when the account is opened. There will be no limit on how many TFSAs each person can set up, keeping in mind that the allowable yearly tax-free contribution is a combined total of all of these accounts.
 
How would I know what my TFSA contribution room is for a given tax year?
The Canada Revenue Agency (CRA) will determine TFSA contribution room (based on information provided by issuers) for each eligible individual who files an annual T1 individual income tax return.
Individuals who have not filed returns for prior years (because for example, there was no tax payable) would be permitted to establish their entitlement to contribution room by filing a return for those years or by other means acceptable to the CRA.  
 
If I don't have the money to invest in a given year, would I be able to use any unused contribution room in a future year?
Yes, the 2008 budget proposes no limit on the number of years unused contribution room could be carried forward. 

How much can you contribute to a TFSA per year?
Each year you could contribute an amount up to your contribution room for the year. The TFSA contribution room will be determined by the CRA for each eligible individual who files an annual income tax return. 

Your contribution room would be made up of three amounts:

If I withdrawal can I re-contribute?
If you contribute the full $5000 in the year and withdrawal any or the entire amount prior to the end of that same year, any amounts re-contributed prior to the end of that same year will be considered an over contribution and will be taxed 1% per month for each month that excess contribution remains.

For example:

Let's say you transfer $5,000, the maximum allowed, into your new TFSA at the beginning of 2009. Then, your $5,000 grows to $5,100, which you withdraw in July. You enjoy the fact that you will never have to pay income tax on your $100 of interest, the most taxable form of investment income. You also like the idea that you can re-contribute the $5,100 you withdrew. However, you will face a problem if you re-contribute to your TFSA too soon.

Suppose you eagerly start making monthly deposits in September in hopes of quickly rebuilding your $5,100 balance. By making additional deposits to your TFSA in 2009 (after having already deposited the $5,000 maximum at the start of the year), you will be penalized at the rate of one per cent per month on your "excess deposits."

To avoid penalties, you should wait until the following year to start TFSA re-contributions if you have already reached the maximum contribution limit earlier in the current year.
 
What is the main benefit of saving in a TFSA?
Because capital gains and other investment income earned within a TFSA will not be taxed, an individual contributing $200 a month to a TFSA for 20 years will accumulate about $11,045 more in savings than if the investment had been made in a taxable savings vehicle (unregistered account).
Note: Combined federal-provincial tax savings, based on a $200 monthly contribution for 20 years and a 5.5% rate of return. For unregistered savings, a 21% average tax rate on investment income’s assumed (based on 40% interest, 30% dividends and 30% capital gains, and a middle-income earning account holder).
 
Would there be any restrictions on withdrawals?
No, you could withdraw any amount in the account for any reason. (depending on the type of investment vehicle. ie: locked-in term may have conditions)

How can the TFSA help me with my savings need through my lifetime?
All Canadians have a reason to save to fulfill important lifetime goals and aspirations.

What kind of investments can you hold in a TFSA?
A TFSA would generally be permitted to hold the same investments as a registered retirement savings plan, such as:

Where a TFSA holds a non-qualified investment, a tax of 50% of the fair market value (FMV) of the non-qualified investment will be applied.

What if I contribute excess amounts in my TFSA?
Similar to an RRSP, excess contributions to a TFSA will be subject to a 1% per month penalty tax until withdrawn.
 
How will TFSAs be taxed?
The big advantage to the TFSA is that any income and gains on investments held within it will not be taxed either while held in a TFSA or upon withdrawal, hence the name – Tax-Free Savings Account.
 
What is the effect on income-tested government benefits?
One of the biggest criticisms of the current RRSP system is that when funds are withdrawn upon retirement, not only are they taxed at the retiree’s marginal tax rate, but in many cases the withdrawals affect the retiree’s eligibility for income-tested government benefits and credits. These may include the Age Credit, the Guaranteed Income Supplement (GIS) or even Old Age Security (OAS) benefits.

The Government of Canada announced that since withdrawals from the TFSA are not considered to be income, they will have no impact on government benefits or credits, such as GIS or OAS, or on the Canada Child.
 
What happens upon death?
The fair market value of the TFSA on the date of death will be received by the estate on a tax-free basis, but an income or gains accruing after the date of death will be taxable.

Individuals will be able to name a surviving spouse or common-law partner as a successor account holder, in which case the TFSA will continue to be tax-exempt. Alternatively, the TFSA of a deceased individual can be transferred to the TFSA of a surviving spouse or partner.
 
What happens upon separation or divorce?
On the breakdown of a marriage or a common-law partnership, any amount from the TFSA of one spouse or partner can be transferred to the TFSA of the other while maintaining the tax-exempt status. Note that the transfer will not re-instate the contribution room of the transferor spouse or partner, nor will it be counted against the contribution room of the transferee spouse or partner.

How is a TFSA different from a Registered Retirement Savings Plan (RRSP)?
An RRSP is primarily intended for retirement. The TFSA is like an RRSP for everything else in your life. Both plans offer tax advantages, but they have key differences.

Contributions to an RRSP are deductible and reduce your income for tax purposes. In contrast, your TFSA contributions will not be deductible.

Withdrawals from an RRSP are added to your income and taxed at current rates. Your TFSA withdrawals and growth within your account will not—they will be tax-free.

While the two plans are meant to be tax-neutral, RRSPs will tend to be the better choice when the tax rate upon withdrawal is expected to be lower than the tax rate upon original contribution. Conversely, TFSAs will make more sense if your tax rate (including the effect of RRSP withdrawals on reduced income-tested benefits) will be higher upon ultimate withdrawal than it was when you contributed.
 
The after-tax rates of return on TFSA and RRSP savings are equivalent when effective tax rates are the same at the time of contribution and withdrawal: the value of the tax deduction available for RRSP contributions is equivalent to the value of withdrawing funds from a TFSA on a tax-free basis. The rate of return from saving in either a TFSA or an RRSP is superior to unregistered saving.

For more information on TFSA’s please contact your local community branch or investment advisor.

*Terms & conditions may apply & rates are subject to change. Mutual funds and other securities are offered through Qtrade Advisor, a division of Qtrade Securities Inc., Member of the Canadian Investor Protection Fund.