TFSA Changes

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Tax free savings accounts (TFSAs) were originally introduced by the Canada Revenue Agency (CRA) to allow Canadians over 18 to accumulate savings in a tax-sheltered vehicle throughout their lifetimes. Annual contribution limits of $5,000 were put in place and that amount was indexed to inflation each year to the nearest $500.

The CRA has recently announced that for the first time since the introduction of TFSAs that, cumulative inflation since 2009 has led to an increase to the annual contribution limit. The $5,000 annual contribution limit is indexed to inflation using the Consumer Price Index (CPI) data as reported by Statistics Canada, rounded to the nearest $500. This means that, each year, an unrounded indexed amount is calculated based on increases in the CPI, but the annual contribution limit changes only when the unrounded amount reaches the rounding threshold (see the table below). For 2013, the unrounded indexed amount moved beyond the $5,250 threshold for the first time, so the annual contribution limit increases to $5,500. 

Contribution room can continue to be carried forward for your lifetime and any withdrawals made can be re-contributed the following calendar year. 

As has been the case since their introduction, TFSAs offer interesting savings strategies for virtually every eligible Canadian citizen. Although contributions are not tax-deductible, their growth within the account is tax-sheltered and withdrawals of both principal and earnings are tax-exempt. In addition, those withdrawals do not affect income-tested programs like the Child Tax Benefit, Employment Insurance Benefits or the Old Age Security pension. This means that an individual can earn tax-free investment income in the plan and avoid clawbacks. 

An additional $500 per year in contribution can have an important impact on the amount of tax-free savings an individual can earn. Over a 20 year period, a middle-income saver could accumulate about $2,340* more in tax savings by having the additional $500 going into their TFSA rather than staying in a non-tax sheltered account. 

*Based on annual contributions of $500 for 20 years assuming a 5.5% rate of return. On unregistered savings, a combined federal-provincial average tax rate of 21.5 per cent on investment income is assumed (based on 40 per cent interest, 30 per cent dividends, and 30 per cent capital gains and for a middle income saver). Source: www.fin.gc.ca 

Calculation of TFSA Annual Contribution Limit

  Year  2009  2010  2011  2012  2013 
Indexation increase  (%)    0.6  1.4  2.8  2.0 
Unrounded indexed amount  ($)  5,000  5,030  5,100  5,243  5,348 
TFSA dollar limit  ($)  5,000  5,000  5,000  5,000  5,500