TFSA: How does it work?
A self-managed TFSA allows you to invest in a wide variety of investment solutions and take advantage of their tax-free growth. You can contribute up to CDN $10,000 starting in 2015, per year per person to that account, regardless of your income*. While your contributions are not deductible from your income taxes, the earnings on your investments are not taxable, even after withdrawal.
Moreover, your unused contribution rights can be carried forward to subsequent years. As such, if you haven’t yet contributed to a TFSA, you can do so by using the rights you have acquired since 2009 (the maximum allowed contribution from 2009 to 2012 was CDN $5,000 per year. The contribution room was increased to CDN $5,500 per year in 2013.).
The TFSA is one of the most flexible instruments available today. It allows you to withdraw any amount, whenever you want and for any reason. You will then be granted the right to contribute this amount back to your account as of January 1 st of the year following the withdrawal, in addition to the maximum annual contribution. Amounts earned in or withdrawn from a TFSA do not affect your eligibility for income-tested benefits and federal credits.
You cannot contribute to your spouse's TFSA, but assets held in the account can be transferred to your spouse after your
death and remain tax-exempt. However, in such a case, it is impossible for your spouse to use your remaining contributions.
There is no age limit for contributions and no expiry date for the plan. However, you must be at least 18 years of age to open a TFSA.
This account available in Canadian or American currency.
You can also contribute to the account in kind (for instance, by contributing securities held in one of your non-registered accounts), as long as the investments you transfer are eligible. Doing so will allow you to maximize your TFSA contributions with existing securities without having to liquidate them.
On a tax level, these investments are however considered as having been liquidated at their fair market value at the time of the contribution. If that value exceeds the acquisition cost of the securities, you must declare a capital gain in your income tax declaration. However, it is not possible to declare a loss if the acquisition cost exceeds the current market value. The amount of the contribution is calculated according to the current fair market value.
Since a TFSA does not take into account your income level and that unused contribution rights can be cumulated, it can be used to protect assets you want to shelter from taxes.Source: nbdb.ca
Category: Personal Finance