Tax Free Savings Accounts and Canadian Emigrants Who Leave Canada
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account while the individual is living abroad, but the contributions will be subject to a 1% tax until the amount is withdrawn and designated as a non-resident contribution.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regulations within the country that they are currently a resident within to determine how the laws will affect money withdrawn from the TFSA that is brought into the country.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!