Canada TFSA Tax-Free Savings Account

Editor's note: from http://www.canadiancapitalist.com/

The government brochure announcing the introduction of the TFSA calls it “the single most important personal savings vehicle since the introduction of the Registered Retirement Savings Plan (RRSP)”. Unlike the usual hyperbole, the government is probably understating the importance that TFSAs are likely to play in the savings plans of all Canadians.

The TFSA is the mirror image of RRSPs – contributions are made with after-tax dollars but withdrawals are tax-free. But TFSAs have an interesting twist because any withdrawal from the account creates an equal amount of contribution room. This would allow us to save for an automobile or a dream vacation in a tax efficient manner and replace the savings in the future. How great is that?


Another great feature of the TFSA is that earnings within the account and withdrawals do not affect income-tested benefits such as the Canada Child Tax Benefit or Guaranteed Income Supplement. While the benefits of a RRSP are debatable for low-income earners, the TFSA will provide the tax deferral benefits of a RRSP without any of the drawbacks.

Jonathan Chevreau notes that the TFSA allows income splitting because attribution rules do not apply for income earned within the account. This would allow a higher-income spouse to split income by contributing to the TFSA of a lower-income or stay-at-home spouse.

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