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Home > Investment / RRSP / TFSA > Investments > Tax-Free Savings Account (TFSA) > Who is eligible for a TFSA?

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Tax-Free Savings Account (TFSA)

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Who is eligible
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Contenu de l'Onglet "WHO IS ELIGIBLE FOR A TFSA"

Individuals¹ aged 18 and over who are Canadian residents are eligible for a TFSA. It provides many advantages, regardless of your current situation.

You’re a student who has various projects in mind

Even if you only work part time, you can build up your savings in a TFSA. The only conditions are that you must be at least 18 years of age and a Canadian resident.

The TFSA could be a smart choice for you
Would you like to save up so that you have enough to move out on your own, travel to new places or study in another location? Whatever project you have in mind, the TFSA can help you grow your savings tax-free. Plus, you can withdraw as much as you like, whenever you like, for any reason².

² Subject to the terms and conditions applicable to the selected investments

You’d like to save for retirement

The TFSA doesn’t replace an RRSP but it can help you optimize your retirement strategies. When it comes to choosing between an RRSP and a TFSA, various factors have to be taken into account.
For example, if you currently have a low tax rate (e.g. you’re a student), it may be advantageous for you to start by contributing to a TFSA. Then, when your tax rate is higher, you can withdraw the amounts invested in your TFSA and transfer them into an RRSP so that you could potentially benefit from a tax refund.

Are you hesitating between an RRSP and a TFSA?
One of the factors to consider will be your income tax rate when you’re ready to withdraw the funds. Of course, if you’re able to save by contributing to both an RRSP and a TFSA at the same time, so much the better!

Here’s an example:

If your RRSP deduction rate (tax refund expressed as a percentage) is the same as the tax rate in effect after you retire, contributing to a TFSA is comparable to saving in an RRSP.

Tax refund: 45%
Tax rate after retirement : 45%

If your tax rate is higher after retirement than before (which is the case for retirees affected by the Old Age Security clawback), a TFSA is more advantageous than an RRSP.

Tax refund: 45%
Tax rate after retirement : 55%

If your tax rate is lower after retirement than before (which is the case for most retirees), contributing to an RRSP is more advantageous.

Tax refund:45%
Tax rate after retirement: 35%

	RRSP			TSFA
	Scenario 1	Scenario 2	Scenario 3	TSFA
2009 contribution	$9,091	$9,091	$9,091	$5,000
Tax refund ( 45%)	$(4,091)	$(4,091)	$(4091)	$-
Net cost	$5,000	$5,000	$5,000	$5,000
Total amount accumulated after 20 years (6%)	$29,156	$29,156	$29,156	$16,036
Tax rate after retirement	35%	45%	55%	0%
Income taxes	$(10,205)	$(13,120)	$(16,036)	$-
Net funds available	$18,951	$16,036	$13,120	$16,036

The examples shown here are assumptions only and are intended only to illustrate the possible advantages of these two products under specific conditions.

The information provided here should not be considered advice or notification. Clients must always have their advisor or tax specialist confirm the benefits of the solutions described. This information does not create any legal or contractual obligations for National Bank or its subsidiaries.

You’d like to save in order to cover unforeseen expenses

Investing in your TFSA can be an excellent way to generate an emergency fund. Thanks to its flexibility, the TFSA is an outstanding tool for covering unforeseen expenses because withdrawals³ are not taxable.

^{³Amounts withdrawn from your TFSA can be redeposited starting the following year.}

You’d like to save in order to buy a home

It’s possible to contribute to an RRSP and a TFSA at the same time. If you’re thinking about buying your first home, you can combine the advantages of both investment solutions!

Start by setting aside funds in your TFSA, and then use the amounts from your TFSA to contribute to your RRSP. Wait at least 90 days after you make your first contributions⁴ to your RRSP so that you can be eligible for the Home Buyers’ Plan (HBP)⁵. You and your spouse would each be able to withdraw up to $25,000 from your RRSPs without having to pay any income tax on the withdrawals.

You’d like to buy a home but it wouldn’t be your first
If you don’t qualify for the Home Buyers’ Plan (i.e. you’re not buying your first home), the TFSA is an excellent way to save up for your home purchase. You can set aside funds in a tax free environment and then withdraw them once you find the home of your dreams!

⁴ Your RRSP contributions must remain in your RRSP for at least 90 days before they can be withdrawn under the Home Buyers’ Plan.
⁵ To be eligible for the HBP, the home must be located in Canada, purchased or built before October 1 of the calendar year following the RRSP withdrawal and serve as the buyer’s principal residence within a year of being purchased or built. You and your spouse can each withdraw up to $25,000 from your RRSPs. You have 15 years, as of the second calendar year after the withdrawal, to repay the amounts into your RRSPs. Your annual repayment must be equal to 1/15 of the total amounts withdrawn.

You’re eligible for government benefits and you’d like to minimize the impact of your investment income on your benefits

The income earned in your TFSA and the withdrawals made from your TFSA do not affect your eligibility for income-tested government benefits or credits such as the Guaranteed Income Supplement (GIS), Old Age Security (OAS) or employment insurance.

In other words, regardless of how much your TFSA generates or how much you withdraw, you’ll receive the same benefits that you would if you hadn’t contributed to a TFSA.

You’ve already made the maximum contribution to your RRSP

By putting your additional savings into a TFSA, you can ensure that your investment income will not be taxed.

You’re already retired

If you have surplus savings after you retire, any amounts that you don’t need at the current time can be invested in a TFSA. The income generated by your surplus savings will be tax free.

In addition, the income earned in your TFSA and the withdrawals made from your TFSA will not affect your eligibility for income-tested government benefits and credits such as the Guaranteed Income Supplement (GIS) or Old Age Security (OAS).

You’re over 71 years of age and your spouse is not younger than you
There is no age limit for a TFSA, which means that, unlike an RRSP, you can always continue to build up your savings.

View 3 possible retirement scenarios

Lucy is planning to retire at age 65
She has $110,000 in RRSP savings
She receives $500 a month in CPP benefits, plus OAS and GIS
Her cost of living is $19,750
Her investments show a 6% return

For Lucy’s RRSP strategy to be as effective as investing in a TFSA, she would have to reduce her cost of living from $19,750 to $18,150.

Analysis of 3 scenarios

Keep her RRSP*
If Lucy keeps her RRSP with the conditions above, the funds in her RRSP will be used up by the time she is 79.

Cash in her RRSP over 3 years and deposit her savings in a non-registered account*
If Lucy cashes in her RRSP over a 3-year period and places the funds in a non-registered account, her funds will be used up by the time she is 88.

Cash in her RRSP over 3 years and use the TFSA*
If Lucy cashes in her RRSP over a 3-year period and deposits her savings in a non-registered account and a TFSA as her contribution room allows, her funds will be exhausted by the time she is 100.

* The data presented in these graphs are hypothetical. The calculations are provided for information purposes only to illustrate the advantages that could be gained from using a TFSA in identical conditions.

¹ Other than trusts


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