Benefits of a Tax-Free Savings Account (TFSA)

Dorota Haskins, Chartered Professional Accountant |

Winnipeg Chartered Professional Accountant

With year-end around the corner, I thought it worthwhile to review the benefits tax-free free savings account (TFSA).

Many Canadians will soon be looking at contributing to an RRSP to reduce their tax burden for 2017, but it’s important to not forget about the tax-free alternative “cousin”, the TFSA.

Contributing to RRSPs is a great way to invest for retirement, however, many people don’t realize that it is simply a tax deferral mechanism. While you save on the amount of tax you pay now, you end up paying it when you withdraw the funds at retirement.

The benefit RRSPs provide presumes that you have a higher tax rate now than you will at retirement. Thereby reducing your tax burden on the monies you withdraw from your TFSA.

Whereas, with a tax-free savings account, the money you invest isn’t taxed – EVER!

However, if you anticipate that your tax rate won’t change, then whether you contribute to a TFSA or RRSP won’t make much difference as the end result will ultimately be the same.

For comparison purposes, below is a chart depicting a $5k contribution to both types of funds. The taxpayer in question will be in the same tax bracket before and after retirement.

Tax-Free Savings Account Benefits

  • Funds invested in TFSAs are NEVER subject to tax or capital gains
  • Withdraw funds whenever you want without penalty. But, you can’t re-contribute the amount you withdrew in the same calendar year. The amount you withdrew in 2017 will be added to your contribution room in 2018.
  • Ideal for both short-term and long-term investment goals.
  • No earned-income requirement. Great for retirees or stay-at-home parents.
  • Indefinite carry-forward contribution room. Each year you accumulate contribution room equal to the annual contribution limit for every year you are a resident of Canada.
  • Invest in what you want. Mutual funds, GICs, stocks, bonds – you’re not limited!
  • Lifetime Eligibility. Start contributing once you turn 18 for however long as you are living. You don’t need to withdraw your money at a certain age, which makes it a great alternative to RRSPs.
  • No impact on other government benefits. Contributions will not affect eligibility for OAS/OAP, GST or child tax since they are reported on your tax returns.
  • Double-up! Open an account for both you and your spouse – that’s $104k in tax-free savings!!!

If you’re on a limited budget, have your financial institution set up automatic monthly, bi-weekly or weekly withdrawals direct to your TFSA (set it & forget it).

BUT – don’t think that you should ONLY be contributing to one or the other.

My recommendation to my clients is to max out their TFSAs before contributing to an RRSP. However, you should really consider them as complementary products since they both provide you with benefits.

And since it’s the holiday season, why not consider the gift of a Tax-Free Savings Account contribution? While it doesn’t provide tax benefits, it’s definitely something that’s beneficial whether in the short-term or long-term.

TFSA contribution limits by year:

2009 – $5k 
2010 – $5k 
2011 – $5k 
2012 – $5k 
2013 – $5.5k 
2014 – $5.5k 
2015 – $10k 
2016 – $5.5k 
2017 – $5.5k

Cumulative room available $52k.