Canada Highlights Tax-Free Savings Accounts

by Mike Godfrey, Tax-News.com, Washington

05 January 2012

Canadian Minister of Finance Jim Flaherty and Gail Shea, Minister of National Revenue, have highlighted that, as of January 1, 2012, Canadians will have a new CAD5,000 of room to invest in their Tax-Free Savings Account (TFSA).

The TFSA is a flexible, registered, general-purpose savings vehicle that allows Canadians to earn tax-free investment income. Canadian residents aged 18 and older, can save up to CAD5,000 every year in a TFSA. They can contain a range of investments, similar to those in a Registered Retirement Savings Plan, such as mutual funds, listed securities and guaranteed investment certificates.

However, contributions to a TFSA are not deductible for income tax purposes but the investment income, including capital gains, earned in a TFSA is not taxed, even when withdrawn. Unused TFSA contribution room is carried forward and accumulates for future years.

“TFSAs will continue to enable Canadians to more easily meet their savings goals by allowing them to earn investment income absolutely tax-free,” said Flaherty. “Savings contribute to economic growth by increasing the funds available for economic investment, which leads to a higher capacity to produce goods and services and improves the standard of living of Canadians.”

“Approximately 8.2 million TFSA accounts have been opened to date, and we expect that number to grow,” said Shea. “We are thrilled to see Canadians taking advantage of this savings vehicle.”

The government has, however, faced criticism over the way in which it publicized the rules for TFSAs, with a report from Taxpayer Ombudsman J. Paul Dubé last year highlighting the confusion felt by many over the way in which the CAD5,000 limit works. Under current rules, money withdrawn from a TFSA can be put back into the account, but only up to the CAD5,000 limit. This, the report says, has caused confusion, with 72,786 (1.5%) of the 4.8m who opened a TFSA in 2010 receiving a letter from the CRA about possible excess contributions.

In response, the Canada Revenue Agency (CRA), criticized for failing to actively inform the public of the tax consequences involved in TFSAs, has said that it is continuing in its work to increase awareness of TFSA guidelines among Canadians and financial institutions. According to its figures, of the 6.7m possessing a TFSA, over 98% have managed the account in accordance with the guidelines. In addition, it expects to send less than 1.5% of account holders a letter asking for further information about their accounts.

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