If you have not already opened up a tax-free savings account (TFSA), you may want to consider taking advantage of this exciting and relatively new savings vehicle. The government introduced it to the Canadian public on January 1st, 2009. Its best feature, the account is exempt from taxes: neither capital gains not investment income are taxed when withdrawals are made from this account. For example, suppose you contributed $5,000 (the maximum allowed) in a Canadian equity within the TFSA at the beginning of 2009. The markets worked well for you, so your $5,000 investment grew to $6,000. When you withdraw the $6,000, the government will not tax your $1,000 gain upon withdrawal. Hard as it may be to believe, it’s true. If you had put that money in a non-registered account and applied the same scenario, the government would have taxed 50 per cent of your capital gains. For the TSFA, just as in the Registered Retirement Savings Plan (RRSP), the government carries forward unused portions of the contribution room every year. If you did not open a TFSA account in 2009, that year’s $5,000 of contribution room would have been carried forward to 2010, permitting you to deposit up to $10,000 if you decide to open an account this year. Revenue Canada lets you know how much contribution room you have available for the TFSA in your income tax assessment. As mentioned earlier, there is a limit as to how much you can deposit into a TFSA; for 2010, you must stay within $5,000. If … [Read more...]