Any unused contribution room can be carried forward from a previous year for use in future years. Contributions are not deductible for tax purposes; however, all income and capital gains earned in the account grow tax-free. All withdrawals from the TFSA (including income and capital gains) are received tax-free. In addition, the amount of the withdrawal will increase your TFSA carry-forward contribution room in the following year.
A TFSA is beneficial for many investors and for many different reasons, including saving for short-term purchases such as an automobile or saving longer term for retirement. TFSAs can also be an effective income-splitting tool. A higher-income spouse can give funds to the lower-income spouse or an adult child so that they can contribute to their own TFSA (subject to their personal TFSA contribution limits). As well, the attribution rules will not apply to income earned within the spouse’s (or adult child’s) TFSA.
For older investors, TFSAs provide a tax-efficient means of investing – particularly beyond the age of 71 when they are no longer eligible to contribute to their own RRSP. In addition, if retirees are required to take more income than they need from a RRIF, they can contribute the excess amounts to a TFSA (subject to their TFSA contribution limit) and continue to shelter future investment earnings from tax. Furthermore, any withdrawals from a TFSA will not affect the eligibility for federal income-tested benefits and credits (such as Old Age Security or Guaranteed Income Supplements).
Where possible, the TFSA should be used in conjunction with an RRSP and other tax-deferred savings plans, such as an RESP. However, where funds are limited, a TFSA may be an appropriate savings vehicle for individuals who have forgone RRSP contributions because of the limited benefit of a tax deduction at low marginal tax rates. For others in a higher marginal tax bracket, a tax refund resulting from an RRSP contribution could be used to fund a contribution to a TFSA. Otherwise, the benefit of contributing to an RRSP versus a TFSA will depend largely on your tax rate at the time of contribution and at the time of withdrawal, upon retirement. Generally, an RRSP contribution will be more beneficial where the individual is in a higher tax bracket when contributing than they are expected to be when drawing upon the RRSP funds at retirement (including the possible clawback of any government benefits). However, there is no “one-size fits all” rule and each situation should be considered individually.
The types of investments eligible for a TFSA are very similar to those investments eligible to be held within an RRSP. Similar to an RRSP, because of the tax-free nature of a TFSA, income that would otherwise be taxed at high rates outside a registered account, such as interest income, would be appropriate for a TFSA. Investments that may generate capital losses may not be appropriate for a TFSA since capital losses realized within a TFSA will have no tax benefit.
However, ultimately the choice of specific investments in a TFSA will be unique to the investor, depending on such factors as their income needs, the investment time frame and their investment goals, tolerance for risk and overall investment strategy.
Berryman & Associates