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TFSA Rationale

Tax-Free Money for What Matters to You

Effective January 2, 2009

Canadians need to save for many different purposes over their lifetimes. Reducing taxes on savings can help. That’s why the Government has introduced a new Tax-Free Savings Account (TFSA). It’s likely the single most important personal savings vehicle since the introduction of the Registered Retirement Savings Plan (RRSP).

The TFSA will allow Canadians to set money aside in eligible investment vehicles and watch those savings grow tax-free throughout their lifetimes. TFSA savings can be used to purchase a new car, renovate a house, start a small business or take a family vacation. With the TFSA Canadians from all income levels and all walks of life can benefit.

What is the Rationale of a Tax Free Savings Account?

The world economy is going through a very turbulent phase with recessionary symptoms including a plummeting stock market, loss of jobs, and low consumer confidence.  Everyone is affected by the economic crisis that many countries in the world are facing.  In this scenario an average person sits back and wonders, “Can I do something to protect myself?  Can I make my future secure? Is it better to have control on my own money by saving it as I want?”  The answer to these questions is a solid yes. 

People have to take control of their own savings and choose safe options for a financially secure future.  It is not wise to spend more than you earn or to spend all that you earn.  It is also not wise to invest all your money into any one investment vehicle, say, equity or mutual funds or foreign markets.  Financial wisdom suggests that a person should spread his “eggs” in “many different baskets” instead of putting “all the eggs in one basket”.  This will help him cushion any financial contingency in one of his investments.  Hence, while a person must invest in stocks and mutual funds, he must also put some money aside in a savings account.tax free savings account: salient features

In this context we will study the concept of a Tax Free Savings Account introduced in Canada by the federal government.  The Tax-Free Savings Account scheme is expected to start in 2009 and offers a registered flexible general-purpose account. Unlike the regular savings account which is taxable there is no tax associated with this account.  The objective of introducing a Tax-Free Savings Account (TFSA) is

  • to encourage Canadians to save,
  • and to reduce their tax liability on investment income through a TFSA.
  • Some of the salient features of a Tax-Free Savings Account (TFSA) are listed below.

    1. The accounts would be started in January 2009.  Canadians 18 years and older having a Social Insurance Number (SIN) are eligible to set up such accounts. 
    2. Such an account will encourage Canadians to save up to a maximum of 5000$ (almost 400$ per month). The unused account can be carried forward for the following month.  For example, if a person saves only 2500$ in a year the next year his total contribution can be up to 7500$ (5000$ plus the rollover 2500$).  Please look at the following hypothetical chart showing expected maximum savings per annum (5000$), the actual savings of a person, and the rollover contribution in the following years.  Hence a person can save an additional 1000$ (over and above 5000$) in 2010.Your browser may not support display of this image.
    3. It is hoped that if a person is able to contribute even 200$ to this account every month for 20 years he would accumulate about $11,000 more in savings as compared to a similar investment in a regular taxable savings account (The Department of Finance).
    4. Another incentive is that any income earned in this account is tax-free, including capital gains.

    The propensity to save ensures us of a safe future.  The propensity to make wise investment choices ensures us of a financially stable future.  Certainly saving in a tax free savings account is a very wise option in the current economic situation.

 
 

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