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Tax-Free Savings Account

Interest deductibility
Since the income earned inside a TFSA along with TFSA withdrawals are non-taxable, you won’t be able to write off any interest expense on funds borrowed for the purpose of investing in a TFSA.

As loan collateral
Unlike RRSPs, which cannot be used as collateral for a loan (unless you want your RRSP deregistered and immediately taxed), TFSA assets can be used as collateral, which may facilitate investors obtaining secured credit for other purposes at more favourable rates.

No spousal income attribution
Where an individual contributes to a non-registered investment of a spouse or partner, the income attribution rules will attribute taxation back to the contributor. The TFSA rules contain a specific exception to these attribution rules, effectively creating a new avenue for spousal wealth planning.

What happens upon death?
The fair market value of the TFSA on the date of death will be received by the estate on a tax-free basis; any income or gains accruing after the date of death will be taxable. The ability to name a direct beneficiary on a TFSA will depend on future amendments to provincial laws allowing for such designations.

Rollover to spouse
An individual may designate a surviving spouse or partner as a successor account holder to continue the particular TFSA or transfer the value to the survivor’s own TFSA. Either way, the account continues to be tax-exempt and there is no effect on the survivor’s own existing TFSA contribution room.

What happens upon separation or divorce?
On the breakdown of a marriage or a common-law partnership, any TFSA amount may be transferred from the TFSA of one spouse or partner to the TFSA of the other while maintaining the tax-exempt status. Such transfers do not recover contribution room for the transferor, nor do they affect the existing room of the transferee.

What if you become a non-resident?
If you become a non-resident, you can still hold your TFSA and continue to benefit from the tax exemption on investment income and withdrawals, but no contributions will be permitted nor will TFSA contribution room continue to accrue. Any contributions made during non-residency will be subject to a 1% penalty per month for each month these funds remain in the plan.


TFSAs vs. RRSPs
While the plans are meant to be tax-neutral where a person has the same marginal tax rate at all times (see chart below), RRSPs will tend to make more sense when the tax rate upon withdrawal is expected to be lower than your tax rate upon original contribution. Conversely, TFSAs will work out better if your tax rate (including the effect of RRSP withdrawals on reduced income-tested benefits) will be higher upon ultimate withdrawal than it was when you contributed.

TSFAs compared to RRSPs at a constant income tax rate

  RRSP TFSA
Pre-tax income $1,000 $1,000
Tax on contribution (40%) n/a (400)
Net contribution 1,000 600
Growth at 6% over 20 years 3,207 1,924
Tax on withdrawal (40%) (1,283) n/a
Net cash $1,924 $1,924
Where there is a tax rate differential between the year you contribute and the year you withdraw High to low favours RRSP Low to high favours TFSA