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 :)