Tuesday, February 26, 2008

Canadian Tax-Free Savings Account

The Conservatives delivered the Government of Canada 2008 Budget today and one of the major surprises was the introduction of a tax-free savings account.

The new Tax-Free Savings Account is "a flexible savings vehicle that allows Canadians to contribute up to $5,000 a year to the account. Investment income, including capital gains, earned within the account will not be taxed and withdrawals will be tax-free."

How will the Tax-Free Savings Account 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.
You can read more about the specific details of the proposed Tax-Free Savings Account (TFSA) in Chapter 3 and Annex 4 of the Budget 2008 document.

Although I would have preferred a higher contribution limit, this is a great step forward.
Next step: Tax-free capital gains :)

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