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Monday, December 15, 2008

NEW: TAX FREE SAVINGS ACCOUNT (TFSA)

This fall, the federal government announced a nice little perk for Canadians with investment income. Starting January 1, 2009, everyone 18 and over, can contribute up to $5,000 to a Tax Free Savings Account (TFSA). Nearly every type of investment can be deposited there. The beauty of these is that they are not taxed when income is earned. For example, if you deposit $5,000 to a GIC, the interest is not taxed when you pull it out.

Where this is possibly more powerful is if you have (non RRSP registered) stocks that have devalued recently. If you believe that they are underpriced, they could be a good choice for this TFSA deposit. Of course, you must be of the mind-set that the market will come back and that these stocks are currently a bargain. Transferring these stocks into the TFSA would trigger a gain or loss for your personal tax in the year transferred.

Note, that you do not get to write off the deposit, as you would an RRSP, but unlike an RRSP, you will never be taxed on the growth and there is no requirement to collapse this plan, as there is with RRSPs.

Over the years, as long as this plan is in place, you will get an additional $5,000 of contribution room, per year.
Your bank or investment advisor should be able to assist you in setting one of these up. Note that every bank has a link if you search “Tax Free Savings Account”. Please read through their summaries and FAQ’s.