Chartered Professional Accountants

TAX FREE SAVINGS ACCOUNT (TFSA) – Not so simple after all

If you had a little extra money and you wanted to save it, what is the best route?  This problem is one of the biggest issues for individuals to think about.  Would you put the amount in a TFSA, RRSP or simply pay down your debts?  Well, if you do decide to invest in a TFSA account, there are a couple items to consider before doing so:

  •  Not all income are taxed equally; some are taxed more advantageously. Therefore when contributing to a TFSA, the mix of investments types needs to be considered
  •  Individuals that are subject to US tax may not benefit from a TFSA as the income will still be subject to US taxes
  •  Withdrawals made cannot be re-invested back into the account meaning the account may not be ideal as a daily savings account.  If you do withdraw and re-contribute, you will be subject to significant penalties.
  •  Non-residents should not contribute to a TFSA as they will be subject to a 1% per month penalty on any contributions

Sometimes, paying off debts can become a priority over contributing into a TFSA or RRSP account; however, this would require special considerations specific to the individual’s current tax rate, expected future income, interest rates on debt, and expected investment returns.

As an example, paying off non-deductible debt with a interest rate of 5% would yield a pre-tax return equivalent to 7% to 9%; so it may be more beneficial then investing in a GIC earning a 2% return in a TFSA.

If you are unsure of which to do first or require further advice on TFSA , please contact us and your financial advisor.

The preceding information is for educational purposes only. As it is impossible to include all situations, circumstances and exceptions in a commentary such as this, a further review should be done. Every effort has been made to ensure the accuracy of the information contained in this commentary. However, because of the nature of the subject, no person or firm involved in the distribution or preparation of this commentary accepts any liability for its contents or use.

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