RRSP Season

Tax-free savings accounts a good product with a bad name, experts say

Tax-free savings accounts, or TFSAs, have been available to Canadians since 2009, but they're not being used to their full potential. Financial experts put a large part of the blame on the name.

TFSAs still aren't being used to potential 6 years after their creation

Money experts say the name Tax-Free Savings Account leads people to believe it's a standard savings account, meant for short-term savings and frequent withdrawals. (CBC)

What's in a name, financially speaking?

Tax-free savings accounts, or TFSAs, have been available to Canadians since 2009, but they're not being used to their full potential, say financial experts, who put a large part of the blame on the name.

"The name is huge," said Rubina Ahmed-Haq, a personal finance expert in Toronto. "You've got to call things what they are." 

"It is a misnomer to call it a TFSA," said Peter Bowen, vice-president of tax research and solutions at Fidelity Investments Canada. "That was a mistake made by the government when these were launched, I would argue."
Rubina Ahmed-Haq says many people don't realize that the room you have in your TFSA is retroactive to 2009, even if you're starting one today. (Supplied)

Money experts say the name leads people to believe it's a standard savings account, meant for short-term savings and frequent withdrawals.

"They kind of dip in and dip out whenever they want, but that's not really what it's meant for," said Ayana Forward, a certified financial planner at Ryan Lamontagne Inc. in Ottawa.

In fact, TFSAs allow users to invest large sums of money tax-free using almost any investment possibility, giving Canadians a key place to save money medium- and long-term.

Here are some key things to know about TFSAs:

TFSAs are flexible

Several of the experts who spoke to CBC News said the TFSA would be better named an "investment account" rather than a "savings account," since it can shelter myriad investment possibilities: high-interest savings accounts, mutual funds, guaranteed investment certificates, listed securities and other types of qualified investment products.

And unlike RRSPs, you pay no income tax when you withdraw funds. (Conversely, deposits aren't tax-deductible.)

"They're very flexible," Bowen said of TFSAs. "They can benefit Canadians across all age groups and all income levels. They can be used for short-term savings, but also for mid-term [such as for a house] and most importantly for long-term."

Bowen said it's "wrong" to use a TFSA as a typical savings account.

"The asset allocation should be considered with a very long-term view," he said. "We hope people are sitting down with their financial advisers to really make that work for themselves."

Dipping can get you dinged

​Ahmed-Haq said a sure sign that people don't understand how TFSAs are supposed to work is the annual batch of stories about tens of thousands of people who have paid fines because they overcontribute.

Canada Revenue Agency charges one per cent per month on the amount over your contribution limit. If you overcontributed by $1,000 for a year, you'd lose $120.

Why are people overcontributing? Because they're taking money out of the account and putting new money in, not realizing that every dollar deposited counts towards the contribution limit no matter how much you take out.

"If you took the same $1,000 and put it in seven times and took it out seven times, you've gone over, even though you still have $1,000," Ahmed-Haq said.

Limits lower, but contribution room remains

A fresh bit of confusion was in the offing this year, because for the first time since TFSAs were created the contribution limit has dropped.

However, "the Liberal government made the changes in a manner that was relatively straightforward," Bowen said, noting that several more complicated approaches had been bandied about in the media.

On Jan. 1, the annual contribution limit for TFSAs shrunk to $5,500, instead of the $10,000 the previous government had implemented for 2015.

Which brings up another blind spot in some Canadians' knowledge: Ahmed-Haq said many people don't realize that the contribution room in a TFSA is retroactive to when they were created, even if you're just starting one today.

The rules around the accounts allow the contribution limits to accumulate starting from 2009 for each year during which a person turned 18 or was over that age, held a social insurance number and was a resident of Canada.

Therefore the limit for anyone opening an account for the first time today and who was at least 18 in 2009 would be $46,500.

​Sometimes TFSAs trump RRSP​s

TFSAs are more than just an add-on to Canadians' life savings. In several cases, a TFSA actually makes more sense than a registered retirement savings plan. 

Someone with a lucrative pension might consider a TFSA, because the money in it isn't considered income the way an RRSP withdrawal is.

"You don't really want to have an RRSP and a pension at the same time," Forward explained.

"You don't want to put yourself in that higher tax bracket. So a TFSA is really good for someone who has a good, solid pension ... so that they can have some savings without really worrying about the tax implications of those withdrawals later on in life.

"They're also good for low-income learners who might not get the most bang for their buck for an RRSP deduction, or someone saving for the short term, like for a house."

TFSAs are better than debt

Warren MacKenzie, president and CEO of Weigh House Investor Services in Toronto, said he deals with mostly high-net-worth clients who understand the subtleties of a TFSA. 

But he disagreed with the idea that the accounts shouldn't ever be used for short-term savings.

MacKenzie said there are no good reasons aside from lack of funds for not using a TFSA.

It's better to use a TFSA for long-term savings, but if you want to use it as a short-term bank account that's a good strategy too, because you're saving, not going into debt, he said.

"Even if you're using it not to its full advantage, it's better to save the money than to [spend] it on a credit card," he said.


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