TFSA, or tax-free profits for Canadians

The government of this wonderful country of Canada has introduced the new Tax-Free Savings Account (TFSA). Starting in 2009, Canadians aged 18 and older can save up to $5,000 every year in a TFSA. Investment income (interest, dividends, capital gains) earned inside a TFSA account will not be taxed, not even when the funds are eventually withdrawn (though losses are not deductible either).

Canadiens, open a TFSA account with one of the soundest banks in the world:

• Royal Bank of Canada
• Canadian Imperial Bank of Commerce
• Bank of Montreal
• Toronto-Dominion Bank
• National Bank of Canada

While a primary consideration should be given to contributing to an RRSP (for the immediate tax relief), the TFSA has several attractive features. It doesn't have to be converted into anything else by age 71. It's effectively invisible (both its earned income and money withdrawn from it) in regards to federal income-sensitive benefits and credits, an important point for e.g., future recipients of OAS (Old Age Security) pension. Any amounts withdrawn can be put back in the following year(s), without affecting the regular contribution room available.

Almost everything you might want to know about TFSAs can be found on the CRA (Canada Revenue Agency) site. For instance, if you don't manage to open such an account this year, you will not lose this year's $5,000 contribution room: you can open a $10K account in 2010.

As earned income is not a prerequisite for contributing to a TFSA (unlike an RRSP), you can gift money to your spouse and/or adult children for their TFSAs. The earnings in these accounts are not attributed back to you for tax purposes.

Note that if you purchase dividend-paying US stocks (e.g., Microsoft) in your TFSA, a 15% non-resident withholding tax applies to the dividends (unlike inside an RRSP or RRIF, but like in a RESP), which cannot be recovered.

Financial Post's TFSA Centre has a few investment ideas.

Adam Smith (1723-1790), who studied moral philosophy and is being considered by many the father of modern economics, once told a learned society in Edinburgh, "Little else is requisite to carry a state to the highest degree of opulence but peace, easy taxes, and a tolerable administration of justice."