Canada·Q&A

After 6 years, TFSAs still source of confusion

It's been around for a half-dozen years, but the tax-free savings account remains one of the most widely misunderstood investment vehicles, says CBC money columnist Rubina Ahmed-Haq.

Many Canadians don't understand accounts, Rubina Ahmed-Haq says - and things could get worse.

Less than 40 per cent of qualified Canadians have opened a TFSA. (Getty Images)

It's been around for a half-dozen years, but the tax-free savings account remains one of the most widely misunderstood investment vehicles, says CBC money columnist Rubina Ahmed-Haq.

Newly minted Liberal Finance Minister Bill Morneau is expected to cancel last year's increase to TFSA contribution limits. (Twitter @Bill_Morneau)
Less than 40 per cent of qualified Canadians have opened one, proving many are unaware of its savings power.

Now the newly elected Liberal government has said it intends to claw back the annual contribution limit on the registered account. Earlier this year, the Conservatives raised it to $10,000 — a significant increase from the previous ceiling of $5,500. 

The changes will only add to Canadians' confusion over the savings tool, Ahmed-Haq said.

What exactly is a TFSA?

"It's a registered savings account," said Ahmed-Haq. "Just like the registered retirement savings plan (RRSP) or registered education savings plan (RESP), when you open a TFSA, the account is recorded with the Canada Revenue Agency (CRA).

"With the TFSA, your deposits, unlike the RRSP, are not tax deductible — so no benefits when you file your tax return. But your investments grow tax free, and unlike the RRSP, when you withdraw funds, you pay no income tax. Or, as would be the case with a non registered account, capital gains tax. This is one of the key benefits of the TFSA and, in my opinion, one of the most misunderstood."

Where does the confusion come from? 

Anecdotal reports suggest many Canadians use the TFSA like a regular account, Ahmed-Haq said — making withdrawals and deposits the way they would at a bank. But that's not what the account is intended for.

"Unlike the RRSP, which is for retirement savings, the TFSA can be used to build money up for anything: a down payment on a house, to help with your child's education or [to buy] a new car," said Ahmed-Haq. "But the horizon should still be many years, not months."

You should use your TFSA to buy investments such as stocks, bonds or mutual funds, said Ahmed-Haq. And to properly make money from those, you've got to leave them be. 

"By constantly withdrawing and depositing, you are losing the benefit of time and compound interest."

How much can I contribute this year? 

There's a strong argument that Canadians in a lower income bracket should consider saving through a TFSA instead of an RRSP .- Rubina Ahmed-Haq

In this year's budget, the former Conservative government increased the contribution limit from $5,500 to $10,000.

The new Liberal government wants to revert back to the $5,500 limit. The argument is the higher limit will only benefit wealthy Canadians — and will reduce future tax revenues.

But some groups have challenged that assumption. The Canadian Association for Retired Persons recently pointed out that more people who earn less than $60,000 a year have maxed out their TFSAs than those who make more than $60,000.

"There's a strong argument that Canadians in a lower income bracket should consider saving through a TFSA instead of an RRSP," said Ahmed-Haq. 

Change the name

Top on Ahmed-Haq's list for clearing up confusion: change the name of the TFSA.

"Some colleagues and I kicked around possibilities, and we came up with tax free investment plan," said Ahmed-Haq. "Or what about a registered tax free plan?"

"The words 'savings account' makes people think it's an everyday account rather than one for long-term investment. The sooner we could get rid of that name, the better, in my view."

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