Definition of Tax Free Savings Account
What is a TFSA?
A TFSA is another name for a "Tax Free Savings Account".
The Tax Free Savings Accounts were introduced in the 2008 Canadian Budget by federal finance minister Jim Flaherty. These accounts came into effect on January 1st, 2009.
The TFSA is a savings vehicle that allows Canadians to save money every year without accruing any tax liability. Canadians can put up to $5,000 per year into their TFSA - unused space will carry over into following years (for instance, if you can only deposit $2500 into your TFSA in 2009, then you will be able to deposit $7500 in 2010).
Accepted investment vehicles can grow tax-free in a TFSA account. Also, withdrawals can be made from a TFSA account at any time, without having to worry about capital gains tax.
For instance, if you contribute to the maximum amount every year and manage to double your $50,000 total investment after ten years, then the $50,000 in profits would be completely tax-free. Plus, you could withdraw this money at any time.
Unlike an RRSP, contributions to a TFSA account are not tax-deductible. However, as previously stated, there are no penalties for withdrawing money early and you never have to pay tax on your gains.
The contribution limits for the TFSA are indexed to inflation, and will go up in $500 increments.
You are only allowed to have one TFSA account in your name, however you are able to contribute to a spouse's TFSA account as well. So even if you are the only income earner in your family, your spouse can still open up an account and you can still contribute to their account.
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