A TFSA is a flexible savings account for Canadians aged 18 and older. A TFSA allows owners to earn tax-free investment income in a registered government account. Investment income earned as well as withdrawn are TAX-FREE. Individual stocks, ETF’s, mutual funds, GIC’s and some bonds are all eligible to be held within a TFSA.
The owner of the account may contribute up to $5,000 CAD annually starting from 2009 or the year the owner turned 18. A TFSA has a carry forward benefit allowing you to use un-used contribution room in future years. Full amounts withdrawn may be re-contributed in future years, BUT you must wait until the following year or a penalty will occur. You may have multiple TFSA accounts but can not exceed your limit designated by un-used contribution room (2 accounts holding $10,000 each). There are strict penalties for over contributing (1% a month) and it will continue being charged to your account until the over-contribution amount is withdrawn or absorbed by charges. There is no grace amount, period or notifications.
Example 1: If you turned 18 in 2009, and have not previously contributed to a TFSA you would currently have $20,000 contribution room. (2009, 2010, 2011, 2012) In 2013 you will be eligible to contribute an additional $5,000 or a total of $25,000.
Example 2: If you turned 18 in 2011 you would have $10,000 limit (2011, 2012). You contribute $10,000 on your 19th birthday a year later (July 8th, 2012) but decide in November you would like to take a vacation. You withdraw $6,500 leaving $3,500 in your account. You must wait until 2013 to re-contribute to your TFSA but will have a $11,500 limit (2011, 2012, 2013 = $15,000) ($15,000 – 3,500 still in your account = $11,500 limit)
Capital gains tax can be a very costly endeavour and should be avoided at all costs.
NOTE: As of November 26th 2012: Starting Jan. 2013 government has increased TFSA limit to $5,500