Archive for the ‘Tax Free Savings Accounts’ Category

A Layman’s Guide on Tax Free Savings Account

Thursday, February 11th, 2010

There is a lot of confusion about Tax Free Savings Account or TFSA. The situation is borne out by the wrong notion of people about the “saving account.” While it is true that you can maintain a savings account with the TFSA, you can also utilize the TFSA to purchase stocks, bonds, mutual funds and GICs. The TFSA is basically a shell that is similar to RRSP, as both instruments present opportunities for investment growth tax free.

Here are the essential features of TFSA:

1. Any Canadian citizen, 18 years of age or older, is qualified to make an investment up to a maximum of $5,000 annually.

2. No taxes will be levied on any gains and this will include capital gains.

3. There are no withdrawal limitation for the money deposited in TFSA

4. Any amount of money that is withdrawn from the TFSA can be re-deposited after a certain period of time and will not have any effect on the contribution room.

5. Any used portion of the contribution room for a particular year can be forwarded and credited to the succeeding year.

6. TFSA has no lifetime contribution cap

7. Assets from the TFSA account of a deceased spouse can be transferred to the surviving spouse tax free.

Financial experts are seeing the upsides of TFSA. This plan comes as a welcome breather for Canadians amid the declining and low interest rates. Its attractive tax exemption feature is considered as the clincher for this plan. However, there are certain concerns that you must be aware of when considering TFSAs. The contribution cap of $5,000 and the fees that will be charged are the two major concerns by most financial managers and investors.

That being said, there are basic differences between TSFA and RRSP. The main difference is on the time you can infuse funds and the time you can take them out. Under the general guidelines of RRSP, you are entitled to a tax refund once you infuse funds in the plan while withdrawal at retirement will be levied with the appropriate tax. On the other hand, you are not entitled to any refund when you infuse funds on TFSA, but you will also don’t have to pay any tax upon withdrawal. In addition to this, your withdrawal will not have any effect on your contribution room and you can make another deposit in the following year.

During its first year, you may opt for a high yielding savings account in your TFSA which can serve as your emergency fund. But you have to remember that this is not the best option if you are looking at TFSA as a viable tax strategy. It would be better for you to opt for high earning investment instruments in your TFSA since you will not have to pay taxes. Using the same decision parameter, it is better for you to place low earning investment instruments such as GICs and bonds into RRSPs. You will end up getting the same amount of refund for the funds that you infuse. And when you finally withdraw your money upon retirement, the amount of tax that you have to pay will not be as much as that with REITs or stocks.

Another great thing about TFSA is that you can use this as your income tax shelter. If you are going to purchase income trusts such as REITs in your TFSAs, you can withdraw the returns as a tax-free continual income. If you are planning to push your limit then it is wise for you to incorporate stocks since these investment instruments are considered tax efficient and are your best pick outside of TFSAs and RRSPs.

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Tax Free Savings Account FAQ:

Question: When you pay back your HBP are you not effectively paying tax on the portion that was “sheltered” interest?
If you use your RRSP savings to put a down payment on a home, when you pay it back (with taxed income), are you not effectively paying tax on what was initially sheltered interest? Why would you use your RRSP to buy a home if this is the case? Wouldn’t you be better off using a TFSA?

Answer: I think you are misunderstanding something here. When you made the initial contributions to your RRSP, you received a tax deduction, thus the contributions were made with before-tax dollars. When you took out the money under the HBP, you did not pay any tax on the withdrawal.

When you repay the HBP, you are using after tax dollars, but you never paid tax on the initial contributions or withdrawals. Thus your conclusion that you are paying tax on the sheltered portion is fallacious.

Using a TFSA is an option to save up for a down payment but the difference is that you don’t get a tax deduction up front for contributions to the TFSA. Therefore, the RRSP/HBP is advantageous, especially for higher income earners.

Question: Should I put money into my car loan or rrsp loan?
I will be getting back about $2000 back from tax refund this year and am wondering what the smart thing to do with it is. I have a car loan that I owe about $15000 on, and an rrsp loan that I owe $4000. The car loan has a higher interest rate then the rrsp loan. I am not having trouble paying either of them off. I am thinking about buying a house and think it might help if I don’t owe a bunch of money to the bank. Another option is to put it all into a tfsa.

Answer: Normally you pay down the loan with the highest interest rate which is most likely the car loan. If you are seeking a mortgage, wait before paying either loan and see a mortgage specialist. They will work with you for free and determine the best thing to do with the excess cash (down pmt vs debt payment).

Question: Canada’s Tax Free Saving Account?
Are we allowed to open TFSA in two different banks? And what about RRSP’s?

Answer: Yes you can open as many TFSA or RRSP accounts as you wish but your restricted to the same contribution limit total for all accounts.

Question: In Canada – Should you Max out your RRSPs? Use a TFSA? Stick with Non-Registered Funds?

Answer: All 3 are completely different products for different purposes. This shouldn’t be an either or question.

Personally, I think the TFSA is being marketed for the completely wrong reasons by the banks and such. This account should be used for long term investing, not saving for a holiday or something. The amount of taxes on savings in one year is minimal, so why waste your TFSA space to save $6 in interest?

RRSP’s are a good start for retirement savings, but you should also have non-registered investments as well, to avoid the big tax bill when you cash them in and so you have something accessible in case of an emergency.

It all boils down to what people can afford and what assets they have available to them and what their goals are.

Question: Credit card debt or TFSA?
The government and banks are pushing the new Tax Free Savings accounts. Should you start to put money in one if you’re still carrying a balance on your credit card?

Answer: I think both. TFSA is saving for your future, which I think is a very good idea for individuals. But at the same time you can pay your credit card debt at least minimum payment. You have to balance savings and paying debt.

Question: Mutual Funds from banks or private brokers?
I am wondering whether I should invest in mutual funds from the banks (i.e. BMO or RBC) or from the private online brokers such as etrade. Good things about banks’ is that I can easily put the funds in my TFSA, and I don’t necessarily have to pay the commission fee separately. But is there any great advantage from online brokers’ mutual funds?

Answer: If you intend to stay in mutual funds, it may be more convenient to invest through a bank. However, if you wish to purchase individual stocks or ETFs one day, you will have to go to a brokerage. Remember, all major Canadian banks have their own on-line brokerages too. My preference would be to go to TD Waterhouse or BMO Investorline. I have a TD Waterhouse account and have a TFSA with them.

If you do wish to stay in mutual funds only, you may want to look at some very low fee index funds offered by BMO Investorline. Keep in mind that most mutual funds under-perform the index they are using as a benchmark. Even if you find a “star” manager, he/she may move to another company. Therefore, you might as well stay with index funds or ETFs.

Question: Are Tax Free Savings accounts insured?
Are the new Canadian TFSA’s insured like RRSP’s?

Answer: Yes and No. It depends on what type of investment you hold under the TFSA. Essentially, the TFSA is a non registered investment so it would not be insured. However, if you were to hold a segregated mutual fund under the TFSA you would receive creditor protection because it is an insurance based product. Some segregated funds offer 100% protection of the face value, while others only offer 75% protection. Just make sure you choose the right one for you.

Question: Are there any capital gains tax for Canadians on u.s. investment?
I’ve just opened a tax free savings account (tfsa) and was wondering if I’m subjected to any capital gains tax on u.s. stock investment or will this tax free savings account only applies to Canadian investment? Also if we are taxed on our gain, what are the rates? Is there going to be a long term and short term rate just like in the u.s.? Or will we just be charged a flat rate of 50%, or so I’ve heard.

Answer: US Stocks held in an account in Canada by a Canadian resident are absolutely not subject to US capital gains tax, unless you are a US Citizen too (in which case the TFSA is pointless). US Stocks held in a Canadian account are deemed to be Canadian property and are taxed accordingly. Also, the capital gain tax rate is 50% of the regular tax rate, not a 50% tax.

Tax Free Savings Account Info For Canadians

Tuesday, February 9th, 2010

So I’ve completed some of my Tax Free Savings Account (TFSA) homework and already I’m impressed. If you don’t already have one set up, hopefully by the time you finish reading you will understand you need to get an account established. Just to warn you, if you haven’t already set one up, it’s not a race, you actually should do some of your own research first as there are many options. As always, some options are much better than others are.

To start with, many people are wondering exactly what is a TFSA and how does it work? When I started researching, I was expecting a very complicated answer to this question, but as it turns out, it’s surprisingly simple. It also has some very promising long term implications as a savings/investment tool.

A TFSA is a special savings account that can be opened by anyone who is a resident of Canada 18 years of age or older. This savings account has a current contribution limit of $5,000 per year and any growth in the principal is completely tax free. This $5,000 is indexed to inflation, but will never decrease below $5,000, so over time you will be able to contribute more in some years and potentially this limit will increase each year.

The part that gets interesting is you can hold the same types of investments in your TFSA that you would also be able to hold in an RRSP. Traditionally this would be mutual funds, GIC’s, bonds and publicly traded securities. Many people are unaware that they can also hold Arms Length mortgages, Mortgage Investment Corporations (MIC’s), or other real estate secured financial instruments in RRSP’s as well which can also be held in a TFSA.

While mutual funds and securities can be quite volatile as everyone has seen with the stock market lately, GIC’s and bonds however are quite stable with their returns. The problems with GIC and bonds are there is so little risk that the returns are low single digit and after inflation you end up almost breaking even, which is not how you get ahead with an investment.

Opportunities like MIC’s and Arms Length mortgages however tend to be slightly riskier, but are attached to property which I consider very secure, and tend to have fixed yearly returns of high single digit and low double digit. Coupling products like these with compounding interest inside a TFSA creates an opportunity for individuals to generate significant growth over time all tax free.

If you consider a couple each investing $5,000 per year in their TFSA and generating a 10% per year return after ten years the $100,000 invested by the couple would be worth $175,000 and is all tax free. Now if you compare this same situation to a $5000 yearly contribution to an RRSP, with the same yearly growth, you would also have the same amount of money at the end, but when you are forced to withdraw it from your RRSP, you would then be taxed on the entire amount!

I’m not positioning this as the end of RRSPs, but as a complementary tool to utilize if you currently have RRSP’s. Or if you don’t use RRSP’s to take advantage of the deduction, you can use the TFSA to save future taxes.

Some great options you have with the TFSA that really help seal the deal is the ability to withdraw from the account at any time and then re-contribute this withdrawn amount back in future years. This allows a younger person just starting out to potentially use the TFSA to save money for a down payment on a house tax free. Or a family could use it as an emergency fund that grows tax free.

Another appealing aspect is carrying over any unused contribution room. If you only have $1,000 to add to it next year, you could then add $9,000 in the following year. This will negate much of the value of compound growth, but will also allow you to contribute more in profitable years, and less in slower years, without being penalized.

Now as you are probably aware, every bank and trust company you can find in Canada seems to be offering to set you up with an account. The part you need to be aware of is that the majority of these institutions will only allow you to place these funds into the limited financial instruments like GIC’s, mutual funds and bonds that they offer. If your goal is to put a certain security fund or MIC into your TFSA, you better be sure you are allowed to do that through the institution you are working with.

Much like RRSP’s there are also some companies allowing you to set up self directed TFSA’s, but if you establish your account with one bank, you may incur additional costs transferring it over to another place. This will require you to have a plan prior to randomly starting the account at your closest bank.

I hope you can see some of the positive possibilities available through setting up one of these accounts and I have managed to get you a bit excited about this. I’m currently looking into more information about some of the MIC’s as I think this may be one of the better options to get started with for people. They are have slightly more risk than a GIC, significantly less risk than most mutual funds, and provide a pretty stable return to grow your investment.

So I have now walked you through the basics of Tax Free Savings Accounts, I’m sure I have now opened a new topic with the option of MIC’s and many of you may be wondering how and where to get information on these. Well don’t worry I won’t leave you hanging with this either. I’m working on information on this as well, so if you want to get updated on this make sure you leave me a comment, email me or give me a call.

Bill Biko http://www.investors.housez.ca

[email protected]

Helping People Generate Their Own Wealth. Visit our blog to find out more!

Tax Free Savings Account FAQ:

Question: What is a tax-free savings account in Canada?
I saw an ad at my bank about opening up a tax-free savings account. That surprised me, because how is the government supposed to know how much you have in your bank account? I never saw that anywhere on the tax forms. I thought the government only taxed you based on how much you make per year. What does a tax-free account mean and should I get one?

Answer: If you have a bank account and earn interest on your money, that interest is taxable. So if you have a lot of money in the account and make, let’s say $200 in interest, that $200 is taxable. The government will know how much you made in interest because the Bank will tell them and issue you (and the Gov’t) a tax form indicating how much money you made in that account.

A Tax Free Savings account is one where the money you earn on your savings (the interest) is NOT taxed; you get to keep it all. You will likely have a maximum of $5000 that you can put into such an account each year (which is more than most people need) and all the interest grows without being taxed. The bank will register that account with the government so they know there will be no tax owing on the interest you make. It was established to help encourage people to save for retirement.

Question: I have vested Restricted Stock Units. Is it smart to transfer them (in kind) to a tax free savings account?
I’ll probably sell them in 3 years or so and I expect that they will increase in value.

Answer: If you transfer any property into a TFSA, you will be deemed to have sold them at whatever their fair market value is on the date of transfer. In the case of stock, this would normally result in you having to report a capital gain. You would not be able to claim a loss as the TFSA would be considered an affiliated person, and the transaction would fall under the superficial loss rules.

Is it smart? Well, essentially, you would be stopping any taxes that will accrue on gains after the transfer. In addition, you would no longer be taxed on any dividends that are paid from the stock as these amounts would be paid to your TFSA. That last would not necessarily be an advantage due to you having lost the ability to use the dividend tax credit.

You’ve got a decision to make, an a few things to consider before you do it.

Question: What’s the best way to save my money?
Which is better for a short term savings? I have $4000 to put aside for my wedding in 2 years. Should I put it in a GIC or a tax free savings account?

Answer: I would avoid GIC’s as they are paying next to nothing on a 2 year term. A proper TFSA should be used for your goals, not one of those interest baring ones.

Question: Putting more money into a TFSA than $5000?
I was looking for a short-term savings account and ING offers one at 3%. It’s their tax-free savings account. It says you can put up to $5000 a year into these accounts, tax-free. More than that and it is taxed.

Does anyone know how much additional amounts would be taxed? On revenue canada’s website it says: “If, at any time in a calendar month, there is an excess TFSA amount in your account, you will be subject to a tax of 1% of the highest such amount in that month.” Which is very confusing. Does this mean my investment will be taxed 1% per month or that the interest earned will be taxed 1% per month?

Answer: Revenue Canada will tax the highest excess balance of the month at 1%, not the interest.

Question: Can I transfer money from my checking account to my tfsa account?

Answer: If you haven’t already maxed out your TFSA, sure! Check your financial institution for what vehicles are available for TFSA investment. Doesn’t matter whether the money is coming from chequing, savings, etc…the only thing that matters for TFSA is the $5000 cap, and where to put your funds into (GICs, stocks, mutual funds, etc.)

Question: TFSA Clarification contribution room allowance?
I have maxed out 5K in 2009 in stocks in the TFSA. In 2010 lets say the stock grew to be worth 20K with the 5K allowance for the new year. If I sold that stock and reinvested it into another set of stocks would the government consider that as excess contribution and make it taxable? Ie. Only be able to buy only 10K worth of stock (2009 5K + 2010 5K

Answer: No your contribution limit has nothing to do with the amount of growth in the plan. Your contribution room at the beginning of the year is equal to unused contribution from previous years plus withdrawals from previous years plus your yearly increase in your dollar limit.

Question: Can I buy an RRSP then shelter it in a Tax Free Savings Account?

Answer: Getting into the technical aspects of this, an RRSP is not an investment. An RRSP is an investment holder and shelters the income generated. A TFSA does the same thing, but in a different way.

That having been said, an RRSP can hold the same type of investment as a TFSA, but the same property cannot be held by both at the same time.

So, no. An RRSP cannot be sheltered inside a TFSA, because an RRSP is already sheltering some sort of investment.

Question: Is the $5000 limit on TFSA automatically available to everyone?
Or does the individual have to earn, say, over $5000 of income during the tax year?

Answer: You can open a TFSA regardless of your income. The annual limit for 2009 was $5,000 and will go up with inflation in future years. If you do not use your full $5,000 you will be able to accumulate it and use it in future years. If you withdraw money from your TFSA, you can make up your withdrawals.

A TFSA can be in the same form as an RRSP account, so mutual funds, etc. are permissible.

Planning For Education

Wednesday, January 20th, 2010

Now that the school year has come around again, you’ve probably spent some thinking about how to fund your child’s (or children’s) education without indebting the whole family to the government and to the banks. The good news is, from a tax and investment perspective, there has never been a better year to bring education funding into your financial plan.

Using a combination of two widely available investment programs, you can put your family ahead of the game: the Registered Educations Savings Plan (RESP) and the Tax-free savings account (TFSA). The RESP is a tax-deferred savings account that allows you to save money for your child’s education (or the education of an unrelated child whose educational needs you are looking out for) without worrying about paying tax on the earned interest or dividends. When you contribute to an RESP, unlike the similarly named RRSP, the contributions are not tax deductible – so keep in mind that this strategy won’t get you a refund cheque. What you will get (assuming you’ve taken advantage of this program when the child beneficiary is young enough) is a partially matched government grant that will add potentially hefty contributions to the savings plan.

When you contribute to an RESP, you will receive a 20% matching contribution in the form of the Canada Education Savings Grant (CESG). The maximum CESG amount for each year is $500 (With a lifetime maximum of $7200). Using this strategy, it wouldn’t be practical to deposit more than $2500 into the RESP on a yearly basis, since you won’t get any more matching dollars over that amount. The grant, along with your RESP contributions, will grow on a tax-free basis. When the RESP beneficiary withdraws the money to pay for educational expenses, the income is taxed in the young one’s hands. Considering that most students have very low annual taxable income, and considering the tax deductions and credits available for most full-time students, the amount of tax they should expect to pay after withdrawing RESP money is usually fairly low – if anything at all.

The Tax Free Savings Account is another useful tool for stashing away long-term education savings. Like the RESP, investment growth inside the TFSA is not taxed while it remains invested. Unlike the RESP, there is no government matching. That’s okay – the TFSA has a special perk which more than makes up for that. When funds are withdrawn from the TFSA, none of the growth is taxed. At all.

Each year, every Canadian over the age of 18 is allowed to make a flat $5000 contribution into a TFSA. In the case of a two-parent household, it’s not unusual for the higher income earner to make all of the contributions (i.e., deposit $5000 into his or her own account, then deposit another $5000 into the account of the lower income-earner), to get a nice break on taxable investment growth. Which means that $10,000 of savings per year can grow tax-free in every household.

Now here’s where the fun part starts. You can contribute $2500 each year to your child’s RESP (and pick up the $500 grant), and then deposit any extra available savings (up to $5000) in your TFSA. When your bright, young prodigy hits 18, you can then withdraw the funds tax-free from your own TFSA, and deposit it into a TFSA set up in the student’s name. The student can then withdraw the funds as necessary, pay no tax on the withdrawals and, at the same time, you have freed up room to make TFSA contributions for your own long-term savings.

Being financially fit includes giving your children a headstart on their education, helping them understand the true value of money and making sure your family doesn’t get saddled with debt for that academic pursuit.

Many Blessings,

Andray Domise
Independent Financial Advisor
Change your life one dollar at a time, with REAL help for building wealth and reducing debt:
http://www.andraydomise.com

Education Savings Plan FAQ:

Question: Registered Education Savings Plan?
How much does a provider or agent (or whatever they are called) make? I was told by someone that they make up to 1500 dollars on every child they register.

Answer: Depends on the company and payment structure, but usually its based on the underlying investments. On average around 2-3%. But that isnt a direct expense to you. It is usually paid to them by the company they work with/for.

Question: What is the best type of long term savings plan to save for my children’s education from middle school up?
I plan on having my children attend private middle school and up and want to start saving. We live in Maryland.

Answer: Your best bet is to talk to a financial adviser that can tell you what is best for your individual situation. As far as a starting point, either a 529 plan or Coverdell Savings account.

Question: What is the best college savings plan for me?
My savings account is with ING and I can’t complaint. Yet, my plan is to work to get a master’s degree sometime around 2010. I’m doing my BS in education.

Answer: Since you will need the money relatively quickly, you should stick to a safe and conservative investment vehicle. I would move money for your education to a 1 year CD.

Question: Do you have or do you plan to start a savings account for your child’s college education?
And did your parents have one for you?

Answer: Not yet and I don’t know if we will. My parents didn’t have one for me, but they still helped for part of my college and the rest I have student loans for. There is a part of me that doesn’t think it’s a parents responsibility at that point. My husband parent’s had an interesting deal with him. They didn’t pay for anything until he finished, but now they are paying back his student loans.

Question: What are some options for saving for my childs college education?
My child is 11. I am a single parent. Should I buy into my states college credit savings plan? What if my child ends up with a sports scholarship, would I lose those college credits? Should I buy bonds instead?

Answer: There are many ways that people save and fun their child’s education. Two popular ones are state sponsored college plans, and 529 Plans.

You would have to read through the specifics on your state sponsored plan as it will have provisions for scholarships and also if the student decided to attend school out of state.

A 529 plan gives you more flexibility. 529 refers to the lines in tax code that say – for money invested in the plan, any growth is available to you tax free when the funds are used for education. There is no provision as to what state the funds are used in, and there is a provision included that deals specifically with scholarships and how to withdraw equal parts from the plan to offset those. Many financial services companies carry these plans – an example is American Funds, also Oppenheimer. The plan has professionally managed portfolios and options that can automatically move to safety as the student gets closer to college. See your financial advisor who can specifically explain the plan to you.

Question: How are you saving for your child’s college education? Specific Plans, etc.?
I’m looking into beginning college savings plans and was wondering what plans you are utilizing to save for your child. We are looking into a UPromise account which is a dressed up 529 account but are there other plans that are as effective?

Answer: We put aside $20 dollars a week for our daughter and at every $500 we put in in a 12 mo. CD. We started when she was born so she’ll have a good start for college between what we’ve saved and the intrest it draws.

Question: What is a tax-free savings account in Canada?
I saw an ad at my bank about opening up a tax-free savings account. That surprised me, because how is the government supposed to know how much you have in your bank account? I never saw that anywhere on the tax forms. I thought the government only taxed you based on how much you make per year. What does a tax-free account mean and should I get one?

Answer: If you have a bank account and earn interest on your money, that interest is taxable. So if you have a lot of money in the account and make, let’s say $200 in interest, that $200 is taxable. The government will know how much you made in interest because the Bank will tell them and issue you (and the Gov’t) a tax form indicating how much money you made in that account.

A Tax Free Savings account is one where the money you earn on your savings (the interest) is NOT taxed; you get to keep it all. You will likely have a maximum of $5000 that you can put into such an account each year (which is more than most people need) and all the interest grows without being taxed. The bank will register that account with the government so they know there will be no tax owing on the interest you make. It was established to help encourage people to save for retirement.

Question: I have vested Restricted Stock Units. Is it smart to transfer them (in kind) to a tax free savings account?
I’ll probably sell them in 3 years or so and I expect that they will increase in value.

Answer: If you transfer any property into a TFSA, you will be deemed to have sold them at whatever their fair market value is on the date of transfer. In the case of stock, this would normally result in you having to report a capital gain. You would not be able to claim a loss as the TFSA would be considered an affiliated person, and the transaction would fall under the superficial loss rules.

Is it smart? Well, essentially, you would be stopping any taxes that will accrue on gains after the transfer. In addition, you would no longer be taxed on any dividends that are paid from the stock as these amounts would be paid to your TFSA. That last would not necessarily be an advantage due to you having lost the ability to use the dividend tax credit.

Hope that helped. You’ve got a decision to make, and a few things to consider before you do it.

Universal Life Accounts and TFSAs

Tuesday, October 27th, 2009

The Universal Life Accounts that Canadians hold are insurance policies that allow Canadians to take advantage of higher returns within the financial market. Most individuals who have Universal Life Accounts are the same individuals going after TFSAs because they want their money to grow and grow. And those with TFSAs are finding that they can acquire even more tax savings by opening up a Universal Life Account.

Universal Life Accounts are insurance that has cash value. These are very beneficial accounts in that an individual’s premium may be taken from their cash value if they don’t make their premium payment. This keeps the policy from lapsing. As for how the policy gains cash value, any payments made above the premium are credited to the cash value. The cash value then gains interest each month. The insurer will determine the interest that is credited to the account, but it is sometimes based on what the financial index or another interest rate index.

Similarities between Universal Life Accounts and TFSAs

There are some similarities between Universal Life Accounts and TFSAs, it is the tax benefits. This is one reason why you find individuals going for both of these accounts. Individuals receive life insurance and a sort of savings plan through their Universal Life Account and they also receive quite the savings plan via their TFSAs. These are great monetary vehicles.

As for the tax benefits, individuals are able to access their cash without paying tax. There are some limited cases in which the policyholder can access their money tax free. But with a TFSA, the accountholder can access their money tax free all of the time. The contributions are tax free and the withdrawals are tax free as well. This allows an individual to keep more money in their pocket. Both accounts place more money within the pockets of Canadians with these accounts.

Tax benefits

The tax benefits of TFSAs are quite obvious. Universal Life Accounts provide an individual with the ability to purchase life insurance in a tax-advantaged way. In the first years of the contract, the premium amount exceeds the cost of the insurance charges. The difference between the two amounts will be tax-deferred during the life of the policy. If an individual holds the policy until their death, then the cash value will not be taxed at all. Since you pay tax on investment growth anyway, it is actually rather rare that an individual has to pay tax on these policies. They usually do escape taxation.

Both Universal Life Accounts and TFSAs offer great ways to make money grow and to save money on taxes. That is why it is a good idea to have both types of accounts because you are covering several areas of your life by having these accounts. You can gain cash value in both accounts and one of them provides you with life insurance. And they both offer you various tax benefits, saving you even more money so that you can keep it in your wallet.

Canadians need to save for many different purposes over their lifetimes. Reducing taxes on savings can help. That’s why the Government has introduced a new Tax-Free Savings Account (TFSA). It’s likely the single most important personal savings vehicle since the introduction of the Registered Retirement Savings Plan (RRSP).

The TFSA will allow Canadians to set money aside in eligible investment vehicles and watch those savings grow tax-free throughout their lifetimes. TFSA savings can be used to purchase a new car, renovate a house, start a small business or take a family vacation. With the TFSA Canadians from all income levels and all walks of life can benefit.

Download your Free Special Independent Review of the TFSA at: http://TaxFreeSavingsAccountInfo.com/

Universal Life Accounts FAQ:

Question: How difficult is it to cancel a Universal Life Insurance policy?

Answer: All insurance contracts are what are known as unilateral contracts (A one way contract). As long as you keep paying into it the company has to abide by what is in the policy, however they can’t force you to keep it. There would likely be some paperwork that requires a signature to cancel it. Aside from the Surrender Charges there shouldn’t be any hidden fees, however all the ‘fees’ to cancel will be outlined in your policy that you have.

Question: Saving money and life insurance?
My husband and I are shopping for life insurance, and are considering Universal Life. The reason being: the cash value claims to be safe from creditors and collections. We do want to save money that earns interest, but can’t do it through a banks because of the many debts that we owe, collections can seize your bank account (they’ve done it to us before). Term life insurance seems like a waste because if the policy expires, we don’t get the money back, and if we have to renew, the premium will definately go up. Does anyone (please?) have any advice regarding these two MAJOR financial decisions?

Answer: I think you may need a term policy with a RETURN OF PREMIUM feature. It’s basically a term policy but it returns 100% of all paid premiums, (if you’re alive) back to you…after the tem is over. It’s not as expensive as UL or Whole. It gives you the same benefit as term…AND your money back, if you don’t die! (If you do die…your beneficiaries get the entire death benefit.) It will give you the protection you need for you and your family… and something to show for it. (And creditors can’t touch it!)

Question: What two adjustments are usually made to the cash value account in a universal life policy?
1. Cost of the term Insurance protection is charged and current interest earned is credited
2 current interest and insurance premiums are credited.
3 guaranteed interest is earned and premiums are credited
4 excess interest and premium are charged

Answer: The premiums are deposited into the policy’s value. Then, each month the cost of insurance and any expense fees/charges are deducted from the surrender value of the policy. At the same time, the value in the policy earns at a certain percentage rate. On fixed life products, they usually offer a guaranteed rate and a current interest rate.

Question: Does anyone have any information on State Farm’s Universal Life Insurance Policy and borrowing money on it?
I remember a long time ago when signing up for these policies they had mentioned something about them having a savings account or something to that affect that you could borrow money on. Did I miss understand them? If you can borrow money on these how do you go about doing this and what kind of penalties are there?

Answer: Give them a call. They may only allow up to 75% of the cash value to be withdrawn. Then again, they may allow the full amount to be withdrawn. If you choose all of it, you will cancel your insurance. If anything less, there is no tax consequence if the amount withdrawn is less than the total amount of premiums that has been paid up til this point. If, on the other hand, there is more in savings than has been paid in premiums, than anything over the amount paid in premium that is withdrawn IS taxable.

Question: Explain Universal vs Term life Insurance Quotes?
My wife and I just bought a Universal life insurance policy. We each have $100,000 in coverage. After talking to my parents, who are 59 and 58 years old and have term life, we think we are paying too much per month for premiums. Our agent showed us and told how the premiums we pay will partially go into a savings account and collect interest. This looked like a good thing and that is why we went with the Universal coverage. He also told us that the premiums for term would keep going up as we got older.

Answer: The short answer of the difference between universal life and term life is cash value. The advantage of cash value is that the universal life has the ability to grow a tax deferred and probably tax free return (I say “probably” because it is possible to not have the tax free return, but I doubt you would have any problems with that.)

With the cash value, you have the opportunity to keep your life insurance policy for your whole life. I don’t know the length of term for your parent’s policy, but their policy will increase in cost over the years and by about age 70 it will be so expensive they will not be able to keep the policies. Therefore, all the money they paid in term premiums they lose (effectively, they “rented” their insurance for 30 or 40 years instead of “buying” their insurance.)

What is the Best Tax Free Savings Account For Children?

Monday, October 26th, 2009

It is said that tomorrow’s doctors, lawyers, judges, and engineers are studying in the schools and colleges today. We have to provide our children quality education and a good childhood. This is important because our children will shape our future, and it is in our hands how we shape their future.

For many Canadian parents the rising cost of their children’s education is of concern. Planning for a child’s education is very important to protect your financial balance. According to Statistics Canada the average annual tuition for a Canadian university undergrad was $4,347 in 2006-07. The fee varies according to the choice of institution and the program enrolled.

For example the cost of college programs in Quebec is different from those offered in Vancouver or Ontario. Similarly cost of an undergrad arts program is significantly lower than an undergrad dentistry, medicine, or engineering program.

You should already have a roadmap for your child’s education but do you also have a financial plan to meet the cost of education? Do you think you can save enough to give your child a decent education? The following paragraphs will highlight how a tax free savings account can be a good option to meet your child’s expenses.

A tax free savings account can be a good savings solution for parents planning for their children’s education. Following are some salient points.

1. Starting in 2009 Canadians aged 18 and older can save up to $5,000 every year in a TFSA. Due to the age restriction children below the age 18 are not eligible to open a TFSA account.

2. Contributions to a TFSA are not tax deductible but investment income including capital gains earned in a TFSA are tax -free.

3. Withdrawals from the TFSA are not taxable and the account holder can withdraw funds at any time. Flexible contribution rules make deposits and withdrawals easy. People may choose to open accounts with spousal contributions to save for their children’s expenditures. The graph below shows how a couple can contribute $5000 or less to the TFSA each year. Please note that since the couple was not able to contribute 5000$ in year 4 the rollover balance of contribution of 1500$ can be contributed in the following years. Hence in the following year the couple contributes 6500$ in all.

4. The money from the account can be withdrawn for any purpose. Even if a couple primarily wanted to save for their child’s education, they still may use the money to meet other needs as well.

5. The 2007 Federal Budget had amended the RESP on the following lines which is very beneficial for Canadian parents. Firstly the $4,000 limit on annual RESP contributions was removed. Secondly the lifetime RESP contribution limit was increased to $50,000 from $42,000. Both these changes offered more flexibility within the account. A person can now save more with the RESP. Thirdly the RESP account can be held for 36 years. Fourthly the maximum annual amount of basic CESG was increased to $500 from $400. These changes are likely to benefit the higher income group but certainly provide more savings options to parents in general.

6. Please note that there are different investment vehicles for investors. The issue is to have the correct savings strategy. At times it is better to consolidate your savings and at times it is better to put your savings in different baskets. For example you must save in a TFSA as soon as you turn 18 and have a propensity to save decent amounts. At this level you are not in a higher tax bracket to use RRSPs. As soon as your income increases you must consider investing in a RRSP. Later you can convert it into a RIF to get pension funds credit. Finally as soon as you plan to raise a family you must think about saving in RESPs.

Remember that if you are already saving in the Registered Education Savings Plan (RESP) it remains the best place to save for a child’s education because any contribution attracts the Canada Education Savings Grants (CESG) resulting in an immediate boost of at least 20%. With the introduction of the TFSA it is best to contribute enough to the RESP to get the maximum allowed CESG of $7,200 per child (for a total RESP contribution of $36,000) and save more in a TFSA.

It is good to save for your children’s future. Every parent wants to give his child the best upbringing and schooling. He knows that good education can shape the future of his child. He also knows that shelling out a large sum of money in a single go is difficult. Many banks, financial institutions, and brokerage firms are offering different TSFA options. It is best to set your financial goals keeping in mind the money required for your child’s education and to consider all the options the various firms are offering.

Canadians need to save for many different purposes over their lifetimes. Reducing taxes on savings can help. That’s why the Government has introduced a new Tax-Free Savings Account (TFSA). It’s likely the single most important personal savings vehicle since the introduction of the Registered Retirement Savings Plan (RRSP).

The TFSA will allow Canadians to set money aside in eligible investment vehicles and watch those savings grow tax-free throughout their lifetimes. TFSA savings can be used to purchase a new car, renovate a house, start a small business or take a family vacation. With the TFSA Canadians from all income levels and all walks of life can benefit.

Download your Free Special Independent Review of the TFSA at: http://TaxFreeSavingsAccountInfo.com/

Tax Free Savings Account FAQ:

Question: Can I deposit $5000.00 each year in my TFSA?

Answer: An individual can invest up to $5,000 per year in a TFSA. The limit will be indexed based on inflation and rounded to nearest $500.

Amounts withdrawn from previous years can be added. For example, an individual who contributed $15,000 over the years and withdrew $12,000 could reinvest $12,000 in addition to the annual limit of $5,000.

It is also possible to defer indefinitely unused contributions.

Excess contributions are subject to a 1% tax per month and should be paid for each dollar exceeding the contribution limits. It is advised to never exceed the limits.

Question: What’s the point of a tax-free savings account?

Answer: As long as you had a regular savings account you were paying taxes on the interest earned in your savings account, now with TFSA you don’t have to pay the tax on the interest earned.

Question: What is the penalty on deposits over $5,000 in a TFSA?

Answer: 1% of the highest excess amount in the month, for each month you are in an over contribution position.

Question: How can we open a savings account for a grandchild without having to provide original birth cert as ID?
My husband has tried to open bank account for the first grandchild but they want so much ID which, living quite a distance from the family we have no access too, besides, we wanted it to be a surprise. There won’t be much money going in the account but over the years it will mount up. We wanted the child’s tax free savings account. Is there any way around this?

Answer: Nope, there is no way round it. The fraud prevention rules and regulations are so strict now. You will have to go by their rules and regulations.

Question: Are the Canadian TFSA’s insured like RRSP’s?

Answer: RRSP’s are not insured per se. If you invest in CD’s or have savings accounts in them those amounts would be. If on the other hand you hold mutual funds, stocks or bonds those amounts would not be insured. The same would hold true for TFSA’s

Question: Should I put my $5000 into my RRSP or the new Tax Free Savings Account?

Answer: It depends on your situation. If you put 5K in your RSP, you’ll get something back when you do your taxes. When you take out of your RSP, you’ll get taxed. If you put 5K in your TFSA, you don’t get anything back. When you take out of your TFSA, you don’t get taxed.

Tax Free Savings Account – Looking a Little Bit Closer

Monday, October 26th, 2009

Starting 2009, Canadians have access to the newest type of savings account, the Tax Free Savings Account, which give investors an opportunity to capitalize on tax free investment benefits. This new account is not widely understood, however, Canadians are excited to learn how it can benefit their financial futures.

One of the primary points to understand about the TFSA is that it is not merely a savings account as you may be familiar with from your local banking institution. A savings account creates an image for many of a low interest, liquid type of cash account. And while you can invest into cash within your TFSA, it presents virtually a limitless list of investment options to consider investing into, including securities, debt instruments and even real estate investments. An investor can invest in virtually whatever investments they wish inside of their TFSA accounts.

Most Canadians are familiar with the traditional RRSP investment account, commonly used for retirement purposes. Unlike the RRSP account, contributions made into the TFSA account are made on an after tax basis. Therefore, when the account owner withdrawals their funds, they are not subject to income taxes as they would if they had invested into an RRSP account. This tax free benefit is one of the largest draws for investors to consider utilizing the TFSA for their financial purposes.

Another key difference between the TFSA and traditional investment accounts is that funds can be withdrawn from the TFSA for virtually any financial purpose. For example, a TFSA owner could utilize those funds to purchase a home, a car, to send their children to college or as a retirement savings vehicle. This flexibility to withdrawal funds without a financial penalty creates flexibility that is attractive to most investors.

One last key difference between this new TFSA account and other retirement accounts is that money can be re-contributed into the account at a later date. For example, if an individual contributes their maximum allowable funds into the TFSA account each year and makes a withdrawal 5 years after they open the account, they can re-contribute the withdrawn amount into their TFSA so that they can take advantage of the tax free benefit again within their future. So, the ability to use this investment vehicle for shorter term financial goals as well as for long term financial goals is appealing to most investors.

While no investment vehicle is a perfect match for every investor, there are several key advantages to the TFSA that should be taken into consideration when creating both a long term and a short term financial strategy. Once the decision has been made to utilize the TFSA for financial goals, the specific investments must be selected for the account to hold. Personal risk tolerance, total investable assets, asset allocation, investment time frame and investment purpose should be taken into consideration when making these individual investment selections.

Canadians need to save for many different purposes over their lifetimes. Reducing taxes on savings can help. That’s why the Government has introduced a new Tax-Free Savings Account (TFSA). It’s likely the single most important personal savings vehicle since the introduction of the Registered Retirement Savings Plan (RRSP).

The TFSA will allow Canadians to set money aside in eligible investment vehicles and watch those savings grow tax-free throughout their lifetimes. TFSA savings can be used to purchase a new car, renovate a house, start a small business or take a family vacation. With the TFSA Canadians from all income levels and all walks of life can benefit.

For more information visit: http://taxfreesavingsaccountinfo.com/

Tax Free Savings Account FAQ:

Question: Tax Free Savings Account TFSA?
I’ve been reading a lot of articles and blogs about the the TFSA. Almost every article I’ve read implies using the TFSA for holding cash investments and GIC’s getting marginal at best returns. I would think the only real advantage in this account doesn’t come into affect until a large balance is attained, so wouldn’t it be advantageous to use it primarily as a vehicle to hold your moderate to high risk investments, maximizing your returns and tax savings?

I have yet to hear of anyone suggest this and I want to know if I’m off my rocker. Please tell me what you think?

Answer: Interest bearing investments that pay only interest and foreign dividends are taxed at 100% so it would advantageous to hold as much of these investments as possible in the TFSA. If you still have room then the Canadian dividends and capital gains could also be earned tax free but these investments already receive special reduced tax treatment.

Question: Interest on Tax-Free Savings Accounts- PC Financial?
I am probably not comprehending the interest calculation on my TFSA correctly. I opened my account in January at 2.55%. For the first month of the account, I deposited $500. When I go to check my interest accrued, it was listed at $0.75. Is there something I am missing? 500 x 0.0255 is $12.75. Even with averaging out the daily account balances, it seems as though I should have earned more interest than $0.75.

Is there something I am missing, or should I be on the phone with my bank?

Answer: That 2.55% is per annum- per YEAR. Not per month. So you’d have to divide the 2.55% by 12 first, to get .21%. Now multiply that by 500 to get 1.05. The difference between that and the .75 has to do with how often the interest is compounded.

Question: Would appreciate feedback about tax-free savings account (TFSA)?
I am considering options for savings and have learned more about the TFSA but would like to hear directly from those who have opened this type of account. How are you finding it? What do you like about it, and dislike, if anything?

Answer: To me it’s like any other savings account, you throw some money in there and wait a couple years. Nothing really to like or dislike really, depending on the ones you go with as they differ from place to place.

Question: It is worth it to split my money into two savings accounts?
Okay so the direct savings account and the tax free savings account both have the same interest rate but the limit on the tax free savings accounts is $5000 per year. which means I’m going to have to split my savings into two accounts. Should I just put the whole things into a direct savings account instead of splitting it into two accounts?

Answer: No, do two accounts so you can take advantage of the tax break. That makes the most sense to me.

Question: Differences between Tax-Free Savings Account and RRSP?

Answer: RRSP provides an immediate tax savings, since all amounts (below your limit) are deducted from income. All amounts (original principal plus any accumulated earnings) are taxable once you withdraw from the RRSP. Earnings accumulate tax free in the interim. The advantage is the immediate tax savings, plus the ability of the earnings to compound over the years.

In the Tax free savings account, you use after tax dollars to contribute. Again, earnings accumulate tax free, but all earnings are taxable once withdrawn. Here the only advantage is the ability of the earnings to compound over the years.

Question: Is the TFSA really tax free?
Don’t you get taxed upfront? I already filed my taxes and there was no mention of tfsa. The interest you earn on a tfsa is tax exempt but that is a pretty small amount. What is with the tax free slogan all the institutions are singing?

Also, what is the “transfer out fee”? And why would I do it? I can just withdraw the money and put it in a different account.

Answer: Do not confuse the TFSA with the RRSP. TFSA has nothing to do with your personal income tax because it involves after tax dollars. When you contribute money to a TFSA, you are subject to a limit of $5k per year.

The big different between a TFSA and a regular account is the tax exempt status of it. As you say, the money you earn is tax exempt and you don’t have to report on your income tax. If you earned $50 in a regular savings account, the bank would issue you a T5 slip and you would report that interest as income when you do your taxes. Had that $50 been earned from a TFSA, the bank won’t issue you a slip because you don’t have to report it.

The transfer out fee is the bank’s way of getting some money out of you for ditching them. Say you don’t like the bank, or want to take your account to another place, this is the fee they are charging you to transfer it from one place to another. Each place can make up their own fee and claim it is a cost of doing business.

Question: Canadian Tax on interest ?
I recently found out that Canadians are required to pay tax on the interest they accumulate in their savings accounts. Can anyone confirm this?

I only came across this after viewing a CIBC commercial that offered “a tax-free account” and I asked myself “why would I need a tax free account??” I do my tax online through Quicktax and I don’t ever recall any request to enter the amount I made on interest. How would I know how much I made on interest? Am I expected to go through all my banking statements and add up the interest?

Answer: If you made above a certain amount, the bank will send you a form at the end of the year that shows your interest income. And yes, tax on interest is virtually certain, worldwide.

Question: Credit card debt or TFSA?
The govt and banks are pushing these new Tax Free Savings accounts. Should you start to put money in one if you’re still carrying a balance on your credit card?

Answer: Normally I tell my clients to have a good balance between debts and savings. After all, you should always pay yourself first by investing your money.

However, when you carry a credit card debt, which is bad debt, you should concentrate on getting rid of the balance.

It is simple math really. Credit card interest rates can be upward of 30% where even in an Aggressive Mutual Fund under the TFSA you will get maybe 12 – 15% at most. So, it makes more sense to pay off your credit card.

If the debt in question was a mortgage or a line of credit where the interest rate was 4-5%, I would suggest the opposite.

Tax Free Savings Accounts and Canadian Emigrants Who Leave Canada

Monday, October 26th, 2009

There is a large population of Canadian citizens who leave Canada to live abroad for a variety of purposes. When an individual leaves the country, they often have a variety of financial questions with regards to their investment accounts within Canada and how they are treated while they are living abroad. Now that there is a new account available to Canadian investors in 2009, the TFSA, new questions are forming within this group of emigrants about how they can take advantage of this account while living abroad.

Can an Emigrant Contribute to their TFSA account while Living Abroad?

A non-resident Canadian citizen who is living abroad can still take advantage of the TFSA account. Emigrants who have left Canada are eligible to maintain their TFSA accounts and the earnings that they make on their investments. In addition, contributions can still be made into the account while the individual is living abroad, but the contributions will be subject to a 1% tax until the amount is withdrawn and designated as a non-resident contribution.

One key point that non-resident Canadians should understand as well is that the annual room within the TFSA accounts for annual contribution will not continue to accrue while they are living abroad. So, these individuals are only allotted contribution allowances into the TFSA account while they are considered residents of Canada.

How are TFSA withdrawals managed for non-resident emigrants living abroad?

A Canadian citizen who is living abroad can make withdrawals from their TFSA accounts while receiving the tax benefits within Canada. But, the individual should review the tax regulations within the country that they are currently a resident within to determine how the laws will affect money withdrawn from the TFSA that is brought into the country.

When a non-resident Canadian makes withdrawals from their TFSA, the room created will remain eligible to the account holder for re-contribution of funds at a later date, giving the investor long term tax free advantages for their investment dollars. However, this room can only be re-utilized when the emigrant becomes a Canadian resident again and cannot be capitalized on while the individual is still living abroad.

Overall, Canadian citizens who emigrate from Canada still receive a variety of the tax benefits that the TFSA offers to Canadians. The account still offers tax free withdrawals and can be used for both long term and short term financial goals. One of the key points to remember is to leverage the maximum contribution allowances during the time periods that the individual is considered to be a resident of Canada, as this money can remain in the account and grow on a tax free basis over the long term. Therefore, it is important to take advantage of compounding growth whenever possible while living overseas by making allowable contributions into the TFSA.

Canadians need to save for many different purposes over their lifetimes. Reducing taxes on savings can help. That’s why the Government has introduced a new Tax-Free Savings Account (TFSA). It’s likely the single most important personal savings vehicle since the introduction of the Registered Retirement Savings Plan (RRSP).

The TFSA will allow Canadians to set money aside in eligible investment vehicles and watch those savings grow tax-free throughout their lifetimes. TFSA savings can be used to purchase a new car, renovate a house, start a small business or take a family vacation. With the TFSA Canadians from all income levels and all walks of life can benefit.

Download your Free Special Independent Review of the TFSA at: http://TaxFreeSavingsAccountInfo.com/

Tax Free Savings Accounts FAQ:

Question: Can I open Tax-Free Savings Account in two different Banks in Canada and transfer money totaling to CA$ 5,000?

Answer: You can open them in as many banks as you want, but you are limited to a max of $5000 total per all the banks, not $5000 at each bank. You can double the amount if you put equal amounts in your spouses name.

Question: What’s the point of a tax-free savings account?
I’ve had many PC Financial accounts for well over 10 years now, have not paid a penny for anything, but now am offered a tax-free savings account? When was I paying tax on it before? What exactly is the point of this account?

Answer: You seem to be thinking of fees, not taxes.

The savings interest in a tax-free savings account is, well, tax-free, as in you do not pay Income Tax on it.

Also, you can hold mutual funds and stocks in a tax-free savings, and the interest, dividends, and capital gains derived will also be tax-free.

Question: Does the new Tax-free savings account lower your taxable income?
Or does it just protect you from paying tax on interest?

Answer: That tax free savings account has nothing to do with your taxable income when you make a deposit (contributions are not tax-deductible). All earnings on the account are tax sheltered and take free upon withdrawal. Be careful where you set it up though…not everyone offers the same types of investments that can maximize your tax savings.

Question: Please help me understand Tax Free Savings Accounts (TFSA).
If I’m understanding right, you can contribute $5000 a year? And then the portion you do not use rolls over to the next year? So is it better to use RRSPs where you get the deduction on income tax or better to save money to use TAX FREE at any time?

Answer: If you are saving for long term, you are better to use the RRSP. With an RRSP, your contribution is a tax deduction, which means it is automatically worth 15-45% more than an after tax contribution to a TFSA.

Yes, you will pay tax on any withdrawals, but over a long period, the growth of that 15-45% increase will more than wipe out that disadvantage.

On the other hand, if you think you’ll want the money out in the shorter term, a TFSA might make sense, provided it is invested in something fairly high earning. Bank interest makes a TFSA almost worthless, in my opinion, and if you want that level of comfort, you’d be MUCH better off with an RRSP, since the tax deduction at start makes way more difference than the piddly little bit of interest you’ll get.

Question: Are Tax Free Savings accounts insured?
Are the new Canadian TFSA’s insured like RRSP’s?

Answer: Yes and No. It depends on what type of investment you hold under the TFSA. Essentially, the TFSA is a non registered investment so it would not be insured. However, if you were to hold a segregated mutual fund under the TFSA you would receive creditor protection because it is an insurance based product. Some segregated funds offer 100% protection of the face value, while others only offer 75% protection. Just make sure you choose the right one for you.

Question: I just opened a tax free savings account?
The banker advised me to. He said the interests are high and tax-free. He said I can also use the money in that account to deduct it against my taxable income. Does anyone know what he is talking about?

Answer: No, you cannot use the amount placed in the TFSA as a deduction. However, any interest earned on the account will not be taxable, which will allow it to grow at a faster rate than ‘normal’ savings.

Interest will NOT be high, I can guarantee that. While those with debt are enjoying the historically low interest rates right now, those with savings are suffering from those same historically low rates. If you’ve got the TFSA invested in a simple interest bearing account, your interest earned this year will be minimal at best. There are other options for your account, such as mutual funds, but those also carry a risk.

Question: How old do you have to be to open a tax-free savings account?

Answer: All Canadian residents over the age of 18 and in possession of a social insurance number. Residents of British Columbia, Newfoundland and Labrador, Nova Scotia or New Brunswick have to be 19 years old. Allowable contribution space will start from the time you turn 18.
So if you are 18 you can register an account. You may have to wait until you are 19 to contribute, if the province you live in is one of the above.

Question: What are the penalties on deposits over $5,000 in the new Tax Free Savings Account?

Answer: Financial institutions will send an electronic file to the government at the end of each year on how much you withdrew and deposited and Revenue Canada will keep track of your contribution room. Your “Notice of Assessment” that you get from Revenue Canada each year will show these amounts.

If you over contribute in one year, CRA will charge you a tax penalty of 1% per month on the amount you over contributed. The financial institutions are not responsible for controlling your deposits as you could have several TFSAs over several institutions. So keep good records!