Tax
Your Tax Free Savings Account (TFSA) – April 2012
Now that tax returns are filed, many of you have already received your notices of assessment. Your tax assessment from the federal government contains lots of vital tax planning information, such as RSP contribution limits, unused capital losses and more. So it is an important document! Be sure to file it with your 2012 tax return for easy access.
A recent addition to the information on your federal notice of assessment is your TFSA (Tax Free Savings Account) contribution limit. The TFSA was introduced by the Harper government back in 2008 as a tax sheltered investment/savings plan to compliment the RSP. Every Canadian resident over the age of 18 can contribute up to $5,000 per year to a TFSA. All income earned in the plan is free from income tax, even when you make a withdrawal. However, unlike the RSP, you do not benefit from a tax deferral on the initial contribution.
Contribution rules
There has been some misunderstanding among the general public as to the TFSA contribution rules. Since the launch of the TFSA program, tens of thousands of Canadian tax-payers have been levied fines for over-contributions, penalties of hundreds of dollars in some cases. Yikes! So make sure you know the rules! If you have more than one TFSA, beware. You can contribute up to $5,000 per year, but this means a total of $5,000 for all plans. Also, if you make a withdrawal in a given year, you must wait until the next calendar year to re deposit that amount. If not, you may surpass your contribution limit and become liable for a penalty that amounts to 1% per month of the total over contribution.
With the program in its fourth year, the total contribution limit to a TFSA is now up to $20,000 for 2012. And with a majority Conservative government in Ottawa, we can pretty much count on the program continuing for at least another 4 years. By then, the total accumulation of the yearly limit will have risen to $40,000 – not a negligible sum! Remember that you can accumulate TFSA contribution room, just as you can for the RSP. So if you miss making a contribution one year, you can catch up the next.
TFSA or RSP?
As the name suggests, the TFSA is ideal for short term savings since withdrawals are not taxable. Having said that, these plans can and should also be used for investing, just like the RSP. Certainly as the total contribution limit increases with each year, the TFSA becomes increasingly useful as part of a long term investment plan.
There has been much discussion in the media as to which plan one should contribute to, the TFSA or the RSP. Of course, there is no one-size fits all solution to this question as everyone’s tax and savings situation is different. For some, the obvious answer is to maximize both plans. For others, who have not yet maxed out their RSPs, the immediate tax savings of the RSP make that plan the preferred choice. Ultimately, there are many factors to consider. You can rest assured that I will help you make the right decision for your individual situation. It is all part of the tax planning process that is intrinsic to a solid investment strategy.
