How would you like to earn income, enjoy a capital gain or get dividends tax free? It is possible to do all this by having a TFSA.
The government allows you, provided you are 18 years of age or older, to contribute $5,000 per year indexed for inflation commencing in 2009. The amounts are not deductible from income but also any gains or income occurring in the account is not taxable.
Remember you are allowed to contribute an amount every year and if you do not contribute the maximum, any balance is carried forward to subsequent years. You should, of course, file a tax return for each year commencing in 2009 so as to establish your eligibility for this contribution.
You may withdraw any amount you wish in any year and said withdrawal is not taxable. In fact, you can deposit the amount previously withdrawn back into the TFSA account but not until a subsequent year.
As stated any increases in value from whatever source are not treated as income and come out tax-free.
I suggest that this vehicle be used for those between 18 and 30 years of age when their earning potential is low and they cannot maximize their advantage on RRSP at the top dollar rate. When you arrive at this dollar point you can either take the money in the TFSA account and roll it to your RRSP or discontinue contributing to your TFSA account and just let it sit.
Once you reach the age of 71 and begin to collect on your RIIF, you can then re-invest in your TFSA account and continue to earn tax-free monies. If you follow this strategy, in the 40 year period from age 30 to age 71, you will have accrued at least $200,000 plus inflation which you can put into your TFSA account. Also, the contribution does not have to be in cash but can be in kind, such as a stock mutual fund or anything which you own and has a low fair market value at date of transfer but you feel will appreciate in time.
You will come out ahead and enjoy having earned tax-free income.
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