Helping Canadians to Save

Introduced in Budget 2008, the TFSA is a new general-purpose tax-efficient savings vehicle for Canadians that complements existing registered savings plans for retirement and education like Registered Retirement Savings Plans (RRSPs) and Registered Education Savings Plans.

In short, the TFSA offers a flexible savings account that will allow Canadians to earn tax-free investment income to more easily meet lifetime savings needs.

The tax assistance provided by a TFSA is, in many ways, a mirror image of that provided through RRSPs:

• RRSP contributions are tax-deductible, with both the contributions and the investment earnings taxable upon withdrawal.
• TFSA contributions are made from after-tax income, with both the contributions and the investment earnings exempt from tax upon withdrawal.

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 RRSP qualified investments.
• The $5,000 annual contribution limit will be indexed to inflation in $500 increments.

TFSA and Seniors

The TFSA will provide seniors with an effective savings vehicle to help meet any ongoing savings needs.

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

In part, this is because neither the income earned in a TFSA nor withdrawals will affect eligibility for federal income-tested benefits and credits such as Old Age Security and Guaranteed Income Supplement benefits, and the Goods and Services Tax Credit.

TFSA and the Economy

Reducing the tax on savings is a powerful tool to support economic growth and improve the standard of living of Canadians. Since there will be no tax paid on the investment income in or withdrawals from these accounts, Canadians will have more incentive to save.

These savings will help increase the funds available for business investment. Over time, higher savings and investment will boost the potential of our economy.

In fact, economic analysis suggests that for every dollar reduction in the tax on savings, gross domestic product will increase by more than three dollars in the long run.