Tax-Free Savings Account
Starting in 2009, Canadians aged 18 and older can contribute up to $5,000 annually (from their taxable income) to a TFSA.
The investment income, including capital gains, earned in a TFSA will not be taxed — even when withdrawn.
The plan also allows an investor to withdraw funds from the TFSA at any time and for any purpose.
Source: CTV News
First off, clearly a good idea. My only regret is that it wasn’t done much sooner (like 10 years ago, when I first came to Canada) and it’s not retroactive.
For the more conservative savers who will deposit the money into some savings account or a GIC, this is not a life-changing event, at least not instantly. $5,000 will earn about $250 in interest at 5%. Normally taxes would take about $40-63 of that amount. If you have 2 people over 18 in the household, that’s roughly $80-126 savings a year. Again, this is conservatively speaking.
For those who invest and do it well, it’s a better deal because historically market returns have been in the 7-10% range. On the other hand, capital gains taxes are fairly lenient as it is.
So, in the end, you will save some money if you just put the money in the bank, or invest in foreign companies.
However, over time I see this as a significant benefit even for conservative people like myself. In 10 years you can potentially have $50,000 saved and the interest on that amount would be much more meaningful. Assuming 5% constant interest rate and a one-time annual contribution at the start of the year (not monthly additions), here is how it would work out:
Variables: 5% rate not guaranteed; $5,000 may be hard to save every year; but on the plus side with monthly contributions instead of one-time annual you’ll get more interest and it’s easier to save that way.
Edited to add: