TFSAs vs RRSPs – Do You Know the Difference?

Contributions made to a TFSA grow on a tax-free basis as well as the income earned in your account. No tax is paid on any amounts that you later withdraw from the account. However, the drawback is that contributions made towards a TFSA are not deductible for tax purposes. Any individual that is a Canadian resident, is 18 years or older and who has a valid social insurance number can contribute to a TFSA. Since the introduction of the TFSA in 2009, the contribution room accumulates every year for each year that an individual is 18 years or older and is a Canadian resident 

An individual that has never contributed in the past, BUT who was 18 years or older since the introduction of TFSA in 2009, can contribute the maximum amount of $75,500 in 2021. 

The annual TFSA contribution limit for 2021 remains the same at $6,000 for individuals turning 18. 

Otherwise, the contribution room for 2021 is $6,000, plus any withdrawals made from the plan in 2020. Withdrawals only increase the contribution room of the TFSA at the beginning of the following year.  

Your TFSA contribution room can be obtained by the following methods: 

    • Contacting the Canada Revenue Agency at 1-800-267-6999 
    • Accessing your personal tax account here
    • Have your authorized representative access your personal tax account 

There is no deadline to contribute to a TFSA. It can be done at anytime during the year, as long as the total contributions do not exceed your maximum limit. In general, the same investments that are permitted for a Registered Retirement Savings Plan (RRSP) are permitted for a TFSA account, the most common being: 

    • Cash 
    • Guaranteed investment certificates (GICs) 
    • Bonds 
    • Equities both Canadian and foreign 
    • Mutual funds 

Non-qualifying and prohibited investments include: 

    • Precious metals
    • Personal property, including works of art, jewelry and antiques
    • Commodity futures contracts
    • Debt or equity in corporations where you have an ownership interest of 10% or more
    • Shares or private holdings companies and shares of foreign private companies
    • Real estate 

You may contribute to multiple TFSA accounts, as long as the maximum contributions across all accounts do not exceed your maximum limit. 

If at any time during the year your maximum limit was exceeded, a 1% tax will apply on the highest excess amount in the month and for each month thereafter, until the excess amount is withdrawn from your account. In general, contributions to a TFSA are better than those made towards an RRSP for the following reasons: 

    • You are at the lowest marginal rate of tax
    • The marginal rate of tax on RRSP withdrawals is expected to be higher compared to the marginal rate of tax than when the contributions were made
    • When you retire, RRSP withdrawals or (RRIF withdrawals after conversion of RRSP at age 71) will likely be high enough to result in the claw back of your old age security pension 
    • A TFSA will give you flexibility in being used as a savings account, which allows for tax-free growth 
    • Withdrawal of funds is tax-free and much quicker to obtain 

Other useful reasons to favor contributing to a TFSA are: 

    • If you don’t have RRSP contribution room available 
    • If, as a senior, you can no longer can contribute to an RRSP 
    • If your personal marginal tax rate is too low but expected to increase in future years. Funds can be initially set aside in a TFSA and then later transferred to a RRSP, to result in greater tax savings when the personal marginal tax rate is higher 

You are permitted to transfer existing TFSAs to your former spouse or common-law partner without affecting neither individual contribution room. The transfer must be completed by the issuer and directly between the two relevant TFSA accounts. 

You must have a court order or separation agreement to settle the rights to the TFSA and you must be living apart when the transfer is executed. Upon your death, the fair market value of the TFSA immediately before death is considered to have been received on a tax-free basis by you. 

In cases where your beneficiary is a spouse or common-law partner, your TFSA can be transferred to their TFSA account without affecting their contribution room. However, two conditions must be met for the transfer to qualify: 

    • It must be made no later than December 31 in your year of death; 
    • Within 30 days of transfer of the TFSA, your surviving spouse or common law partner must file form RC240 – Designation of an Exempt Contribution – Tax-Free Savings Account (TFSA) with the Canada Revenue Agency (available on the Agency’s website). 

In cases where your beneficiary is not a spouse or common-law partner, your TFSA account will cease to be a TFSA. The fair market value of the account will be distributed to your beneficiaries and they may use the funds to contribute towards their own TFSA, to the extent of their contribution room. 

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