Tax-Free Savings Accounts (TFSA):
In their 2008 budget, the federal government introduced a new savings account to help individual Canadians accumulate a greater pool of savings – the Tax-Free Savings Account (TFSA). This new TFSA became available for Canadian residents,18 years of age and older, on January 1, 2009. In that first year between January 2009 and December 2010, over 4.8 million Canadians deposited more than $19 billion into their TFSA accounts. While this may seem like a very high number, when one reviews recent surveys by ING Bank, Royal Bank of Canada, Angus Reid and Ipsos Reid, the results show that Canadians are not taking advantage of the TFSA investment opportunity nearly as much as they should.
Some financial institutions tried to discover why. For example, surveys by the ING Bank (January 2011) and Royal Bank of Canada (February 2011) found the following facts about TFSAs:
- While 77% of Canadians have heard about TFSAs, only 33% of eligible Canadians have opened a TFSA.
- Of those Canadians with a TFSA account, approximately 20% have already withdrawn a portion of their TFSA contributions.
- Of those Canadians that have opened a TSFA account, 87% use their TFSA account as a short-term, emergency fund, with the balance using the TFSA for accumulating savings for a purchase. Home renovations and car purchases are the top two saving goals identified.
- Those Canadians between the ages of 18 and 34 years of age with a TFSA use their TFSA for emergency or everyday spending.
- Among the Baby Boomer generation, 97% have heard of TFSAs and almost 66% of them have opened an account.
In all of the surveys we have reviewed, those Canadians without a TFSA account have cited the following two main reasons for not opening a TFSA account.
- Canadians are finding it increasingly difficult to save. With increasing family expenses, juggling their debt burdens and a need to save for retirement, Canadians do not feel they have any extra money to contribute to a TFSA account.
- Many Canadians find TFSAs confusing and complex.
These reasons are further supported by a recent Royal Bank of Canada survey (October 2010) that shows only 33% of Canadians have a savings account and contribute to it on a regular basis. And approximately 38% of Canadians are unable to save because they have no money left after paying their family’s bills (30%) or are impulse spenders and just cannot save (8%). The remaining Canadians have a savings account, but only contribute to it sporadically.
The same survey found that the 33% that contribute regularly to a savings account use their savings account for emergencies and future vacations.
Judging by these various surveys, the majority of Canadians view the TFSA as a place to hold short-term savings, not a place to accumulate longer-term savings. It appears that Canadians have assigned specific purposes to the different types of accounts available to them. In effect, Canadians seem to believe that:
- Registered Retirement Savings Plans (RRSPs) are for retirement savings
- Taxable Investment Accounts (TIAs) are for long-term savings and investments
- Tax-Free Savings Accounts (TFSAs) are for short-term, emergency savings
Unfortunately, if this is true, then Canadians are missing out on one of the greatest advantages of a TFSA – the long-term accumulation of tax-free investment income. In this TFSA section we would like you to take this opportunity to learn more about TFSAs, from the types of TFSAs available to the rules that govern contributions, withdrawals, fees, etc. so that you can make a more informed decision in your effort to optimize your investment portfolio.