Wednesday, October 29, 2008 0 comments ++[ CLICK TO COMMENT ]++

Canada's Tax-Free Savings Account

Canada is introducing a new tax-free method for savers starting in 2009. It is called the Tax-Free Savings Account (TFSA). It complements the already-existing RRSP method. There are numerous differences between the TFSA and the RRSP so they don't necessarily compete against each other.

Unlike with an RRSP plan, you do not get a tax deduction for contributing to the plan. But you can withdraw from the plan at any time and do not pay taxes for any capital gains, dividends or interest income earned. The amount is also limited to $5000 per year. For further information check out one of the following links:

Article from The Globe & Mail
Department of Finance overview (note: refer to CRA for final details)
ING Direct Top 10 FAQ (I'm not recommending ING but like the brief FAQ)

Appropriateness of the plan depends on the details of an individual and do not construe anything I say to be investment advice, but I would say that this is an ideal plan if you need to save money for a short-term or medium-term purchase (e.g. car, vacation.) It is also likely more attractive to low income people since not getting the tax deduction upon contribution is not as important if you have a low tax rate.



The Canadian TFSA plan moves a step somewhat closer to one of the radical suggestions by Warren Buffett. I remember Buffett saying--I think this was in a Washington Post opinion piece but not sure--that the ideal tax system would be where savers are not taxed, except upon conversion of savings to consumption. Whether one approves of his plan is up to one's ideology but it is consistent with the view that investments improve society in the long term, while consumption is usage of assets for current enjoyment. His suggestion was to let anyone save as much as they want without being taxed. But when the saver withdraws from the savings fund, they will be taxed. The TFSA does not tax you at all so it's only half of the strategy but if you think of sales tax (PST, GST, gasoline tax, cigarette tax, etc) as being a tax on consumption then it is getting close to it.

(One of the big flaw's with Buffett's suggestion is that there is nothing to guarantee that your country will be helped. It's possible for investors to invest elsewhere so, unless you limit investments to the local country (an almost impossible task,) it will help the world as a whole rather than the country. But since government expenses are paid by the country, the tradeoff won't be supported by most citizens.)

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