If, 25 years ago, you had bought $5,000-worth of Microsoft stock with the funds in your Tax-Free Savings Account (TFSA), you’d be sitting on about $3 million today. All yours,
tax-free, exchange rates and adjustments for inflation notwithstanding.
Of course, this assumes that there actually were TFSAs 25 years ago. Still, it’s a worthwhile illustration. One that Brian Murphy, a Chartered Accountant in Whitby says could conceivably be playing out 25 years from now.
“The TFSA is absolutely putting a new game in place when it comes to saving, even making, money,” he says. “And while it’s a bit soon to tell, this has the potential to impact financial planning and investments in a very real way. It’s a bullet-proof tax feature.”
TFSAs may be new here in Canada, but Murphy says other jurisdictions have had similar plans in place for years. And if you’re wondering what the Canada Revenue Agency is thinking, passing up all that tax revenue, Murphy says don’t worry. They know all about it.
“The government wants people to save for retirement. It wants to give us a break on taxes. These are goodies designed to help people who want to help themselves.”
So, want to get in on the game? Murphy gives us the basics:
1. You must be 18 years of age or older.
2. You must be a Canadian tax resident.
3. You must have a social insurance number (SIN).
4. You must formally set up a TFSA with a recognized or accredited financial institution. These are registered plans, and you can’t just decide on a whim that your regular savings account at the corner bank is now your TFSA.
5. You can use your TFSA to purchase pretty much the same kinds of investments that you would with an RRSP or an RRIF. Bonds, mutual funds, GICs and stocks are all fine. You can’t use TFSAs to buy things like raw land, bars of gold or certain shares of small businesses. The federal government bulletin IT-320R3 outlines the eligibility rules.
6. You can contribute up to $5,000 per year for every year you’ve had the TFSA. After 2011, the contribution amount will be indexed to inflation, an adjustment that’s likely to bump-up the maximum limit, Murphy says.
7. You can withdraw the money in your TFSA any time without losing any of the contribution room you’ve accumulated. An important rule to remember, Murphy says, is that withdrawals from increased TFSA assets don’t decrease contribution room, they supplement it. But you will have to wait until the next calendar year to reinvest the amounts you take out.
8. You can use a TFSA to save or invest without impacting other social benefits or programs like Old Age Security or Guaranteed Income Supplements. Murphy says many seniors could save a substantial amount of taxes by investing in a TFSA.
9. You cannot recover losses from a TFSA. If the value of the stocks you buy goes down, you’re on the hook for the loss. Nor can you get back that lost contribution room. Also, you can’t create losses by transferring assets to a TFSA
10. You need to know how a TFSA can best work with your own personal financial plan and investment strategy. Murphy recommends you shop around. Make time to sit down with a Chartered Accountant or financial adviser who will help you understand the risks, the different plans and any of the fees involved.
The Institute of Chartered Accountants of Ontario is the qualifying and regulatory body of Ontario’s 33,000 Chartered Accountants and 5,000 CA students. Since 1879, the Institute has protected the public interest through the CA profession’s high standards of qualification and the enforcement of its rules of professional conduct. The Institute works in partnership with the other provincial Institutes of Chartered Accountants and the Canadian Institute of Chartered Accountants to provide national standards and programs that are used as examples around the world. </em>
