What is a Tax Free Savings Account?
In Canada, the tax free savings account
allows people over 18 years of age to save on their taxes by depositing upto $5000 a year, tax free. This is a flexible savings account that is specifically programmed to generate a Canadian Tax Advantage to help its citizens in these times of economic crisis. The Canadian government, being a welfare oriented government has reduced taxes across the board in order to help its citizens, whether individuals or small businesses or large enterprises. This tax reduction across the entire tax bracket including Goods and Services Tax
has made life much easier for Canadians in the past year of economic turmoil. The tax free savings account is a flexible savings vehicle as everyone may have different financial incomes and expenditures at various times and this account allows you to save whenever and how much ever you possibly can.
This tax free registered account enables them to accumulate upto $5000 a year in tax free income. Any difference or gap in this ceiling can be carried over to the next year. For example if a man saves only $4000 this year then the next year he can save upto $6000, tax free. Capital gains
from the TFSA are also tax free, as are withdrawals. The gap created by any withdrawals can be refilled, tax free. Transfers and contributions to a spouseís or common law partnerís TFSA is allowed under Canadian law
and also upon the spouseís or partnerís demise. The contributions and incomes from the tax free savings account will not affect an individualís or his familyís qualifying for any other federal governmental benefit programs like the CPP, OAS, RRSP
, etc. Also as a family might be saving together for various reasons, like childrenís education, buying a house, a car, etc. this flexible account allows them to consolidate
their savings so they can save more in one year if the ceiling allows them with carried forward credits. Similarly, transfers and contributions being allowed between spouses and common law partners is a boon to a family planning for a special purpose.
Withdrawals and re-contributions enable one to withdraw and use the TFSA money for emergencies and replace them at a later date, as and when possible. As the income and interests from the tax free savings account do not affect the income-based benefits of the federal government like Old Age Security, the Canada Child Tax Benefit and the GIS benefits. As a new general purpose savings account, which is also tax free, the TFSA is unbeatable. It can be complimentary to the existing savings plans for a family like the RRSP, where tax is deferred until retirement. Registered Education Savings Plans are also ideal for saving for your childís education as they attract a 20% education grant from the CESG. The Registered Disability Savings Plan
is also a very good plan for parents to plan for their disabled childís future welfare and security, along with the TFSA. With smart planning and by starting young, a couple can hold almost all their life-time savings in the TFSA so that when it matures in 20 years, their financial assets would have been totally tax free.