Busting TFSA Myths

A January 2011 study by a Canadian bank found that only 50 per cent of Canadians were taking advantage of the TFSA. The TFSA is a great tool because it allows you to earn interest or dividends on your account without having to report that income on your tax return. Why aren’t more people using it? We examined some of the myths that may be holding people back:

It will affect my Child Tax Benefit: Myth. Money in your TFSA is not included in your annual income and does NOT affect your quarterly GST/HST credit or Child Tax Benefit.

I don’t have enough money to open a TFSA: Myth. There is no minimum balance required for a TFSA, only an annual $5,000 maximum contribution. You can have $100 in your account for the whole year and still enjoy tax-free savings.

My savings are small so it doesn’t make a difference: Myth. If you earn more than $50 on a regular savings account, it will be reported on a T5 slip and be added to your annual income.

I don’t earn enough money: Myth. Every Canadian taxpayer over the age of 18 is entitled to open a TFSA with a $5,000 annual contribution limit no matter how much money they earn.

I can’t access my money when I want: Myth. TFSAs offer the flexibility of withdrawing money when you want. And unlike RRSPs, you do not lose your contribution room when you make a withdrawal. You can still only contribute $5,000 per year but if you withdraw a $1,000, that amount is carried forward into the next calendar year so you could contribute $6,000 ($5,000 of new contribution + $1,000 previous withdrawal) the following year.

A TFSA is simple to set-up at just about any financial institution and there are various account options. Make sure you choose one with a risk-level that is comfortable for you. Your bank informs the Canada Revenue Agency about your account so you do not report or record it on your tax return. However, your Notice of Assessment should indicate your TFSA contribution limit for the current tax year.