Tories introduce Tax-Free Savings Account

OTTAWA — Canadians are being encouraged to save for life's big events, not just retirement, with the introduction of the Tax-Free Savings Account (TFSA) in the 2008 Budget.

Starting in 2009, Canadians aged 18 and older can contribute up to $5,000 annually (from their taxable income) to a TFSA.

The investment income, including capital gains, earned in a TFSA will not be taxed -- even when withdrawn.

The plan also allows an investor to withdraw funds from the TFSA at any time and for any purpose.

The withdrawal amount can then be put back at a later date without reducing contribution room.

Additionally, if an investor puts less than $5,000 into a TFSA in a given year, the unused room can be carried forward to future years.

"It's the first account of its kind in Canadian history," Finance Minister Jim Flaherty said in his 2008 Budget Speech.

Don Scott, a tax partner at Welch LLP, told CTV.ca that the TFSA will benefit lower and middle-income taxpayers that are looking for a way to save money.

"You can use the plan to save for a special purpose -- a down payment on a house or to buy a car," said Scott. "It provides an incentive to put money away for that purpose (and) you get the tax break of not having to pay tax on the income that's earned on it while you're saving."

As an example, an individual contributing $200 a month to a TFSA for 20 years, at a 5.5 per cent rate of return, will earn about $11,045 more in savings than if the investment had been made in a taxable savings vehicle (unregistered account).

Seniors will also benefit because they will be able save funds once their age restricts them from contributing to an RRSP, said Scott.

Income or capital gains earned in a TFSA will also not affect eligibility for federal income-tested benefits such as the Guaranteed Income Supplement for low income seniors. The same applies to withdrawals from a TFSA account.

For example, a modest or low-income retired couple, earning $2,000 a year in interest income on an unregistered basis, would see their GIS benefits reduced by $1,000.

If the interest was being earned in a TFSA account, there would be no reduction to their GIS.

Based on current savings patterns, seniors are expected to receive one-half of the total benefits provided by the TFSA, says the 2008 Budget.

The budget estimates that the introduction of TFSAs will reduce federal revenues by $5 million in 2008-09 and $50 million in 2009-10. By 2012-13, the estimated tax savings from TFSAs will be $385 million.

Over the next 20 years, the annual tax savings is estimated to grow to over $3 billion annually.

However, the new account may draw people away from contributing to an RRSP, said Scott.

"It might for the lower and middle-income earner that's wanted to save some money... with the concern that when they took the money out they might pay more tax then the savings they got when they put it in."

Overall, because of the nature of the new plan there will most likely be a better encouragement to put savings away instead of spending it.

"Will savings reduce? Probably not," said Scott. "It's now just a question of which type of plan are you putting your money into."

How the Tax-Free Savings Account Will Work

Starting in 2009, Canadian residents age 18 or older will be eligible to contribute up to $5,000 annually to a TFSA, with unused room being carried forward.
Contributions will not be deductible.
Capital gains and other investment income earned in a TFSA will not be taxed.
Withdrawals will be tax-free.
Neither income earned within a TFSA nor withdrawals from it will affect eligibility for federal income-tested benefits and credits.
Withdrawals will create contribution room for future savings.
Contributions to a spouse's or common-law partner's TFSA will be allowed, and TFSA assets will be transferable to the TFSA of a spouse or common-law partner upon death.
Qualified investments include all arm's-length Registered Retirement Savings Plan (RRSP) qualified investments.
The $5,000 annual contribution limit will be indexed to inflation in $500 increments.

(Source: 2008 Budget)

Comments are now closed for this story

Priscilla Laudon
said

I am in exactly the position Gordon Hughs described. If I take out $5000 of my RIF - since I am a low income senior and on the GIS supplement, I pay taxes to the government, and then GIS takes 1/2 of that $5000 off of my income. Now, what was I thinking when I put that money away? Moths and rust do eat away at misplaced investments!

Craig, Alberta
said

I find it amusing that people are so short sighted as to compare the immediate benifit from contributing to an RRSP vs the long term benifit of this Savings Plan.

If at retirement, your RRSP account was valued at $500K you now are FORCED to pull money out and pay taxes on EVERY dollar you pull out. On the other hand, if your savings had grown to $300k in your Savings Plan, you would actually have MORE CASH IN HAND because every dollar you withdraw is TAX FREE. Plus, you have the option of pulling it out whenever you want/need, and replacing it (unlike RRSPs).

Hopefully that simplifies it and helps you see that you are better off maxing out this Savings Plan FIRST, then move on to your RRSPs. This is a fantastic program.

Andrew
said

The only catch here is for the banks. We put our money into their pockets, because they get to use it while it is sittingin our savings account. In principle this will give the banks of Canada a shot in the arm when it comes to leverage. A smart move on the governments part, because it makes them look good and the banks bring in the bacon.

Livign in Saskatchewan
said

Until I have a little more details, I don't know how this will benefit the middle and lower income families. It sounds good, for lower income brackets "IF" they can save the money then great but what kind of investments are they going to invest in that would earn them a decent interest rate?

I see that capital gains would be tax free etc so that looks like stock portfolios which is great for the upper and rich class as they can afford stocks. Some middle class people might be able to benefit from this, but for lower middle class families it's still going to be harder to scrounge up savings that will earn capital gains etc.

I work in a financial institution and understand that people like having income tax free including myself, but from what I can understand from this account is to help more so for the rich more, if you look at it lower income classes is not likely to invest in higher risk investments that are going to possibly have very big fluctuations in the principle amount so on a 5000 investment that lets say is in one of the banks high interest savings account if that qualifies so the interest rate would be about 3 - 4 %, that's a 200 savings on interest in a year. 200 divided by 12 is only $16.67/month. TELL ME HOW IS THAT HELPING THE LOWER CLASS and some LOWER MIDDLE CLASS FAMILY? Can anyone see how this might be skewed for the higher income class family? If anyone the lower middle class is going to be fooled by this then let this be a warning, it's a way to make the richer richer, and the poorer to stay where they are at.

Need further proof? $5000 of investments bought in shares that is $50.00/share, which works out to 100 shares, the share value grows to $60.00 so now the investment is worth $6000.00 an extra 1000.00 more if they sold it that income is tax free. better than 200 right? So case in point the upper middle and rich class would get this tax free if I understand this correct therefore they would get richer. Tell me how that is fair.

I am more apt to agree to cut income taxes more so towards the lower income class to the middle class as I would see that benefitting more people in the long run.

Also for those who are afraid of RSP's this is for down the road to retirement, even if it is in a lower investment earning account, your investments still grow tax free, you get the benefits at tax time. I encourage to have both non registerd savings for emergencies, and registered for your retirement planning, but this new account. I just can't see the benefits to the majority of people unless someone can point it out otherwhise.

Craig, Edmonton
said

To those that are complaining about 'Not having money to put aside' may want start living within their means. Consumerism has made it too easy to get into debt and PAY interest. It's nice that the government is finally doing something to encourage savings for Joe Average and start MAKING interest...and keeping it.

Peter
said

It is about time there is something without double or triple taxing. Because the money saved already has been taxed. I long for the day when I will be able to send my taxes on the back of a postcard. If the parasitic system on income tax filings ceases to exist so be it. I know it is a dream.

Darla
said

If a recession is coming do we want people to spend more rather than saving it?

Good idea bad timing I think. Good for seniors though and I am getting there soon!

K.K.
said

The catch as I see it, Kelly, is that if your investments within this account lose money, you won't be able to write off those losses as capital losses the way you can for conventional non-registered investments.

skatepro
said

Finally something useful!
For a single person on a moderate (30-40k) income the measly 18% RRSP limit is rapidly reached.
I was hoping they would just put a flat $20,000 ceiling on the RRSP - no such luck.
But over the long haul protecting the interest from 5000 a year is a big help. Even if you only made 4% a year, you would come out 33k ahead after 25 years !

Dan
said

Doesn't really help out the middle class since most of us don't have enough after tax dollars to effectively save. Hmmm mortgage, groceries, rising gasoline and untility costs equal no left over money ! Thank god the basics are covered. Oh wait am I allowed to refer to the Lord...ah another issues.

Dave in Surrey
said

This is a Non Deductable account, basically you pay taxes on the money you put in, unlike an RRSP account where you get a tax deduction...

This really only helps those who have no more room on their RRSP and are saving money for retirement... The odds of any account making you 10% is slim, so basically you will be lucky to get $500 a year that is not tax deductable... This will die off in the near future once people start doing tax returns and their accountants eat up most of the money through processing fees... The average Canadian will never use this... Just fluff adding more buracracy to the picture...

TECH
said

Finally I can make money without being taxed! It's like having a fleet and not need to have it registered in Bermuda! ;-)
If you are DISCIPLINED, the TFSA can become your main income! It all depends on you. Good luck!

Carol
said

This is good for young & old alike. Young people with low incomes can learn to save, leaving their contribution room for their RRSP growing, then when they have a higher income & move into a higher tax bracket, withdraw the $$ out of the TFSA and put it into the RRSP, get the tax deduction. Good for seniors, good for people who do have extra $$ to put away. The only people that will not benefit are the ones who cannot save at all.

Nick
said

What a great idea. It's about time we had something that rewarded people for saving for the future. Thank-you Harper Government! Let's give them a majority, they deserve it.

Jac
said

I think a lot of people are missing the point on this one. I think it is good as a young professional just starting out I would love to save but cant afford to have my money all parked in RRSP. Having somewhere I can make money and still be able to pull it out in case of emergency would be great! RRSP are only good if you can max out the contribution and can have it sit in there for a long time. I cant have my money out of reach at this point cause you just never know what will happen. Then I can recontribute it if get some more money but I dont HAVE to recontribute it as the case is with RRSP again. I think it will be interesting to see where it goes and what will be included as eligible for the tax free savings.

adam
said

from the article:
"Contributions will not be deductible".
That means the money you put in is not deducted from your income as an rrsp contribution is. This account can not be used to lower your income for the purposes of getting a bigger income tax refund. Therefore, it only makes sense to contribute if you have already contributed the maximum to your rrsp.

Calvin and D-, that's why people are saying it's only beneficial to the wealthy.

George D. - Toronto
said

Great innovative plan with substance. Keep up the good work Conservatives.

hjo
said

grey hair senior,
i like that plan. so simple and rewarding for me.
nice easter egg.
thanks' cons.gouvernement.

Bob
said

Fantastic... I recall this being brought up before in the NP newspaper and I wondered if we would see it. Best thing to happen to the tax system since RRSPs. I assume that I will be able to hold investments such as stocks in these accounts.

Calvin
said

D's comment isn't accurate. Contributions are made with after tax dollars, not pre tax dolalrs. As outlined in the How the Account Will Work section above, note "Contributions will not be deductible." This is different that the RRSP where contributions are deductible.

Narin
said

If understood very well, the TFSA mean the Already_Taxed_Money will go into this account, not the one like RRSP; and its interest (or gain from other investments) will not be taxed. I don't see any useful of it unless you have a VERY BIG RETURN on the money you invest from TFSA.

Why should be have to put back the withdrew money? Or we don't have to put it back?

Rob
said

The second point here is that the $5000 is not tax deductable ! This means if you are a high income earner and you are paying 26 to 29% income tax on that $5000 it will take some time to earn intrest equivelent to that amount.

Kim
said

Gary it is great you have money but to ponder you have that much money makes this whole savings plan sound like it is more for the ones that do have money.sorry. "I am middle class raising 2 children and have a spouse claiming common-law and no further a head this year then i am any other year.It just doesn't seem there is a break anywhere in the system.Sure you say you can save money with this Savings Plan, but I don't see it unless I take from my family and kids or bills that I am required to pay every month.AND our income is between 50,000-60,000.The cost of living is going to keep going up so I don't see a savings in any average families pocket.I wish I could see the good in politics but I don't.Maybe I don't understand things enough.

William
said

This is good. If all investments that are RRSP-eligible are allowed, this essentially eliminates tax from investments. Prudently managed, this could be a tremendous boon to the small saver/investor. But I'm still going to vote against them next time.
FB

Trent
said

With the basic information provided, this looks like a good plan. No more double taxation on investments up to $5,000.00 per year. This will probably be more beneficial to the economy in general as it will promote investment which the banks can then turn into funds available for loans to stimulate the economy.

Kelly
said

I'm not biting on this account, as there's always a catch. The government and the banks will benefit, it's never for the common person. I give them good marks, though, for at least trying to make it look good.

D-
said

PS For low income earners who don't need or qualify for a tax credit with an RRSP (like me) this is a BETTER vehicle for savings until one does get into a higher tax bracket. I don't know why some people think that this is only advantageous for "rich" people who have already max. funded their RRSP?!

Calvin Broady
said

Overall this is a great idea, for everyone. I don't know why JF has indicated this is for the wealthy only?! This account isn't linked to income in any way, it's for EVERYONE 18 and up. So if you're 18 and you can save $200 a year, this account works for you. The rationale for saying it's for the wealthy only is beyond me. Anyone (18 or older) can benefit from this account by enjoying tax-free growth on any money they put in there. Simple as that.

People saying they can't afford to save... well that's just foolishness. The government offers new programs like this to help citizens save effectively. If you can't do it, that's a personal issue, and perhaps a course in creating a basic personal budget would help, which has nothing to do the mechanics of an RRSP or TFSA. This kind of statement seems to be deeply rooted in the 1960's type logic - get a job and work hard and at the end of the day, the employer/the government/the union will take care of you. That's not the case anymore. Canadians need to take charge of their own finances. The government offers programs (like this new one) to encourage exactly that. So what are you waiting for??

D-
said

Ummm I think what some of y'all are missing is that the money you put INTO the plan is TAX FREE. You can put $5K per year of tax-free/pre tax income into the account. So not only do you not pay income tax on the $5000 per year that you can put into the plan, you also don't pay tax on the growth within the account AND you don't pay tax upon withdrawal. It also doesn't affect OAP amounts, etc.

Why are people complaining that this isn't as good as getting a tax deferral. It's better than a tax deferral, you never pay the tax in the first place and you don't pay it upon withdrawal either. In many ways it's better than an RRSP, assuming people actually start to learn how to stop living above their means and start doing some good, old fashioned saving.

I'm not a fan of the tories in any way, by the way, but I'm loving this idea. And I'm not rich, I'm a poor 20-something student who happens to work in the financial industry.

calvin
said

2 things:

Withdrawing frees up contribution space - Is this dollar for dollar? What if I but a stock and get a huge return in one year. What if I buy $5,000 of something and next year it's worth $20,000. If I take it all out, do I now have $20,000 of contribution room?

Chuck made a comment about why would anyone ever use an RRSP now. These accounts are totally different, I think most people would still benefit from an RRSP. If you're earning a decent income and are in a fairly high tax bracket, the RRSP contribution gives a tax deduction. The after tax account has no associated deduction. Also, at $5,000 the limit is much lower than the RRSP limit. I think for those who have the means, it would be beneficial to maximize contributions to both savings vehicles.

My 2 cents anyway... Cheers!

Peter
said

Looks like something that may be of interest for the lucky few who have maxed out there RRSP contributions. Say you save 5000 in the account, get 5% interest, you would earn $250. At a high, 45% tax bracket, you would save $113 per year. Or you could put your money in an RRSP, and save the income tax you would pay on it. In the same tax bracket, you'd save $2250 in taxes. More feel good candy for the unaware. Those with maxed out RRSP plans will save a little, and that's about it.

Gary
said

This is great for families. I have 4 kids age 18 to 24. I'm rich, and would like to give them money to invest, but hate the taxes they're subject to. I've maxxed out on RESP, RRSP, and need more space to park my money. This allows me to open an account for each, put in $20K each year, the money growing tax-free. I can set conditions on it ("You can't withdraw until you buy a house, or I'm not putting any more in. After that, we'll see.") For an 18 year old buying a first house at 32, that's $70K accumulating, plus growth - easily $100K or more, each!

Bernard Romanycia
said

A real Catch 22 budget. With the cost of living going through the roof any savings will soon evaporate into hot air. Exactly how will Canada ever get out of debt?
Is everyone happy? I don't think so.

Jim O'Brien
said

Great idea to help people save money. Yes most people don't have much to put away but the important thing is that you start saving. Whatever amount is unused during one year is moved forward. I also suggest that you put it into one of the banks that has no charges. There are several now in Canada.
Stop manking excuses and start saving even a little.

Gordon Hughes CFP
said

This a great improvement but it does not fix the problem that the lowest incoem seniors face that used RRSPs. If they saved $5,000 in an RRSP and don't have any income other than CPP and they withdraw they $5,000 they pay back over $1,200 in taxes and the government takes 50% more. Yes the government claws back the Guaranteed Income Supplement 50 cent for every dollar drawn out of the RRSP. In other words they confiscate 1/2 of the poorest seniors savings. What will they do to fix the past?

bshelt
said

You guys are confused, it is not like an RRSP, the contribution is NOT a tax deduction, just the income earned off of the $5,000.

JF
said

This is for savings after tax only. Yup,.. another right wing hand out to the weathiest Canadians again. Would have been smarter to have applied the tax free to RRSP contributions which are not tax free on investments right now. I can't see many people putting much into this except the wealthiest. As it is most people don't even contribute the max. to their existing RRSPs anyway simply because they don't have the money! This budget helps no one in the real world.

Roger
said

I guess that this seems like a good deal. But I think the opportunity cost in investing in this type of account is gaining Accessibility but sacrificing the potential tax deferral on income into a RRSP. In other words, if an income earner had a marginal tax rate of 35%, the following would have to be balanced: Accessiblity of funds gaining likely at a lower interest rate than a higher interest rate due to refund from a RRSP contribution but no accessibility. Guess it really depends on how accessibility weighs against return on investment/tax deferral.

Denise
said

As Angela said, it's more than just a plain old savings account. If you put the $5000 into the purchase of some (Canadian) bank stock for example, you make money when the stock increases in value and also get dividend payments on the stock. So, with a 10% increase in the stock, plus a typical 4% dividend, you'd make $700 in income over one year, and that money is also tax-free. Obviously, that's a best case scenario, requiring that you put all your eligible money in on January 1st, but you can still earn money on every cent you put in, and it's all tax-free.

Tax Ponderer
said

So let me get this straight. The limit of $5,000 of contribution does not include the compounded interest gained on investments including capital gains. Right? So if a risky invester played the stock market and got a 20% gain, the gain would not be subject to income tax, regardless of tax bracket, and this gain would not erode the contribution room for future years. Right

John
said

Don't forget Chuck - With every $5000
you put into an RRSP , depending what Tax bracket you fall under, you get a substantial refund to do with what you want. If you put $2000 dollars in this year and you make $30,000a year then you will get a $500-$600. refund. On $5000.it would be around$1400.

This doesn't happen with this new PLan but it's a good plan though. I like it

Geoffrey
said

What middle class family can afford to save? Mine can. I am a public school teacher whose salary is our main source of income, as my wife stays home with our children. Our savings are large because of a combination of frugal living, and tithing, resulting in large income tax returns. This despite a large vacation every summer. This new kind of savings account sounds like a good idea - it will be nice to have savings interest that I don't have to pay taxes on.

kriss
said

question: if one were to put 1 dollar into the account the first year, then 1 dollar in the account again the next, then 1 dollar again in the 3rd year, can one then in the 4th year put in 20k into the account?

Mark
said

I'm a lower to middle income earner, approx 33-45k per year with a family of 3.

With this new account, saving for a mortgage will be a much more feasible option. Especially since I already have to contribute to RRSP's to lower my taxes...

I should be able to put away 3k/year and as my income goes up I will be able to use more of what I didn't use. How is that a bad thing?

D-
said

Michael, the interest rate would depend on whatever you invested your money in. It's basically like an RRSP, and as the article states you can use the same investments that one can use in an rrsp (mutual funds, stocks?, GIC's etc. I would assume)

Kim, the savings are better on this than just increasing your basic tax-free income amount because not only is the $5000 tax-free but also all money that you make on the investments in your account. That is HUGE because it allows you to grow funds in your account without being taxed annually, so you're basically compounding and making a lot more long-term than you would by having $5000 more basic tax-free income.

Jen
said

The financial industry needs time to create this new type of account.. and so, it doesn't surprise me that it won't be available until 2009!

This is great - I love that withdrawing frees up more contribution space!

Sue
said

Just leave it to the government to complicate things more and more. So now the people with money will have to keep track of yet another overrated tax free account. Banks will look to charge fees to administer this. Conversely, the people with no money will get absolutely no benefits at all.

Just lower the income tax rate! Keep it simple!

Gord Smith
said

Pardon the cynicism but wait until the commercial banking firms hit you with low interest rates and high administrative fees to service this TFSA....then watch the benefits quickly disappear!

Angela
said

To Michael: Qualified investments include all arm's-length Registered Retirement Savings Plan (RRSP) qualified investments.

So this TFSA could be ANY account so your interest will vary.

I don't think this means that it has to be a traditional savings account earning 4% or whatever.

Chuck
said

Does anyone else think the TFSA is WAY better than and RRSP? I mean who would even put money into an RRSP now?

I like this idea, though I doubt many could reach the $5000 limit. Anyhow...its much smarter than a stupid GST cut.

Rich
said

It's about time!

Krista
said

This sounds great. As I am in the lowest tax bracket I do not like to put too much into an RSP while I am in the lowest tax bracket because I don't want to pay more taxes on it later when I withdraw it. This provides me an avenue where I can save for retirement and pay the lower taxes now. Plus I can utilize that same money for any number of reasons and not have to pay fees and with holding taxes to get at my own money. The more I think about it the more I like it... I just wish I didn't have to wait until next year to open one!

Paul
said

Agreed with Kim. What middle income family has an extra $5k sitting around looking for a little shelter?

Michael
said

What will be the interest rate on this account? Per month, per year,

Cal in Ottawa
said

Why wait until 2009? This is long overdue. In fact, once you have been taxed on your income, you should not be taxed on what you do with that income, ever! That is double or treble taxation. So a step in the right/correct direction.

Paul
said

Great plan. Basically, the interest on your first $5K of savings is tax-free.

I wonder, though, if the provinces will want to tax it like ordinary income.

Still, half a loaf is better than none.

Mark
said

What a great idea. This tax plan will allow me to invest my spare cash, earn income tax free and use the money (including the interest/gain) at any time. Bets the heck out of the lack of flexibility RRSP's offers.

JP
said

I think it's pretty neat thing actually. But, oddly, why not just allow everyone to have $5000 of their income tax free every year. It would seem easier.. maybe I'm missing something

Alan Browe
said

Damnit, I want the TFSA account now when I have the spare cash to put into it.

Kelly
said

this sounds like a great idea but I do wonder what the "catch" is.

As the lower income earner I would rather save my money this way than RRSPs.

Dave, Ottawa
said

This is awesome! Small amounts of interest income should never have been taxed in the first place. Way to go, Steve and Jim, for getting rid of my biggest tax-time pet peeve.

Kim
said

I don't understand politics that much but I do understand there is nothing here once again for a middle class family of 4. This savings plan would be great if people were actually able to SAVE MONEY!! How are you suppose to save money when the cost of living is too high, and everything keeps going up in price!

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