As of January 2nd, 2009, residents of Canada 18 and older will be able to contribute up to $5,000 to a Tax-Free Savings Account (TFSA) annually. Investment income, including interest income, capital gains and dividends earned within the account will be tax free – even when withdrawn. The TFSA is widely seen as a welcome addition to the tax-efficient saving and investment options currently available for Canadians that will complement existing registered savings plans.

Although the TFSA has no up-front tax deduction (unlike RRSPs), the money that is withdrawn is not taxed, including interest income, capital gains or dividends which compound tax-free. If all funds are withdrawn from the plan, the full amount is available tax-free plus the withdrawal is added to future contribution room. Also unlike RRSPs, there is no maximum age limit for contributing to a TFSA. So, the good news is that the TFSA gives retirees a tax free investment option where one has never existed before.

Another interesting feature of the TFSA is the income splitting opportunity that it affords, because attribution rules do not apply to income earned within the account. As a result, the TFSA allows a higher-income spouse to split investment income by contributing to the TFSA of a lower-income spouse.

A ScotiaMcLeod advisor can answer any questions you may have on the TFSA and with the support from experts within the Scotiabank Group, can help you implement a tax-wise investment plan that is appropriate for your personal situation.