Tax Free Savings Account
What is it and how to apply for it.
Within the Canadian financial system, a Tax-Free Savings Account is a bank account offering tax-free services. This type of account, which is commonly abbreviated as TFSA, allows members to deposit and withdraw money without being taxed. This financial system was introduced as a federal budget mechanism aimed at cushioning citizens from conventional taxation. It seeks to encourage and increase savings among Canadians preparing themselves for future financial uncertainties. In practice, this account operates in an opposite manner when compared to typical retirement savings plans. Retirement plans impose tax deductions to all contributions made or withdrawals conducted by the account owners. On the contrary, the TFSA exempts tax deductions to any form of contribution or withdrawal made from the account. However, TFSA accounts attract no taxes from Canadian government only. This means that income contributions from outside Canada may be taxed by involved countries.
Despite explicit tax freedom provided, other relevant terms and conditions places an annual contribution limit at $5,500. This maximum limit is a revised version which took effect as from January 2013. Prior to the revision of the limit, TFSA allowed members to make a maximum contribution of $5000. In case a member does not reach the maximum contribution limit, then any unused space will be carried forward to subsequent annual periods. Therefore, total allowable contributions for any given year will include the placed annual dollar limit plus any unused room from the preceding period.
Prior to opening Tax-Free Savings Account, one has to meet some pre-set eligibility factors. First, these accounts are open to use by Canadian citizens only. Foreigners working or living in Canada do not qualify to access this tax-free savings program. Apart from citizenship requirement, eligible members should be over 18 years of age and must hold a Social Insurance Number. Therefore, Canadians meetings these conditions can open accounts and start making contributions to the scheme. In Canada, the Tax-Free Savings Account opening is handled and processed by HSBC Holdings Inc. Account application process entails just three steps. First step involves completing a form online, which requires providing personal information as well as a bit of financial background content. Upon successful filling of the form, one will download and sign it. The last step will comprise of emailing the signed form, together with a printed cheque of any amount to the relevant department of HSBC Holdings within Canada.
One benefit of the savings account in subject is that members are not required to be in formal employment of have a regular income. TFSA allows members to make contributions from even investment income, which could be capital gains, interest earned or even dividends. In this case, contributions from any income related source are neither taxed, nor are their subsequent withdrawals also taxed. This proves beneficial since money accumulates faster than in taxable accounts. At this juncture, one can appreciate the fact that Tax-Free Savings Account is a flexible savings scheme, which allows members to contribute and withdraw money tax-free. Therefore, TFSA presents a beneficial and lucrative opportunity for Canadians with surplus income to save their money without fear of the tax burden.
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