Ready, Set… Save

The TFSA is the result of a comprehensive tax policy analysis and review by the federal government dating back to the late 1980s. Several studies on the taxation of savings and investments were conducted, which led to the concept of a tax prepaid savings plan (TPSP). Despite the effort expended, the TPSP never became a reality. However, the federal government committed to reviewing the concept of this plan type once again in 2003. This time, the outcome was more favourable, with the eventual creation of the TFSA through the 2008 federal budget.

TFSA Highlights

The passing of Bill C-50 in the House of Commons on June 9, 2008, allowed the provisions in the federal budget to be implemented, including those dealing with TFSAs. Effective Jan. 1, 2009, the TFSA allows all Canadian residents over the age of 18 to contribute up to $5,000 in after-tax money to a tax-free investment account.

While contributions to a TFSA do not generate a tax deduction, all investment income and withdrawals are tax-free. This is in contrast to a registered retirement savings plan (RRSP), which provides a deduction for contributions but requires that tax be paid on any funds withdrawn.

The TFSA is primarily a savings account that is not specifically targeted for retirement savings. However, the fact that withdrawals do not compromise an individual’s eligibility for federal meanstested benefits—and that Canadians over the age of 71 can contribute to a TFSA—makes this an attractive retirement savings vehicle for some people.

Other TFSA-related provisions from Bill C-50 include:
• a contribution limit for each year after 2009 to be rounded to the nearest, rather than the lowest, $500 multiple and indexed according to the Consumer Price Index;
• a 1% penalty tax for excess contributions based on the highest contribution amount in that month (no $2,000 overcontribution limit as with RRSPs);
• an increase in contribution room in a subsequent year after any withdrawals; and
• similar issuer and investment rules to RRSPs.

Interested Parties

While many Canadians looking to make an informed decision of whether or not to contribute to a TFSA will be comparing it to an RRSP, chances are they’ll be in favour of the new vehicle.

Based on past experiences in the U.S. and the U.K. with similar savings arrangements, it is likely that a comparable trend will develop with the retail TFSA product offered by Canadian financial institutions. Banks, investment dealers and other financial services companies have been quick to market their individual TFSAs with the expectation of garnering initial early-bird interest from those with available savings to warrant opening such an account. In addition to interest incentives, there is also intense competition to capture market share in the form of fee reductions and even the waiver of administration fees.

While employers’ initial interest in adding a group TFSA—either as a complement to the company’s overall benefits program or on a stand-alone basis—has been limited to date, it will likely increase with time. In fact, plan sponsors should consider the following benefits of a TFSA.
• It creates a more flexible and marketable benefits program for attracting and retaining employees.
• It substantiates a company as an employer of choice in a specific field or industry.
• It allows employees to save on a taxeffective basis for shorter-term savings goals, including (but not restricted to) retirement.
• It allows employees to set aside funds for unforeseen events or costs in retirement.
• It allows lower income earners to avoid the impact of means-tested benefits after age 65.