Tax-Free Savings Account

A tax-free savings account is a Canadian savings account that charges no taxes on earned interest, dividends paid by Canadian companies, or capital gains on stock issued by Canadian companies. Account holders may also withdraw funds from a tax-free savings account without tax penalties. Any Canadian resident 18 years old or older with a valid social insurance number may open a tax-free savings account. Non-residents with property or social ties to Canada may be eligible for a tax-free savings account under some circumstances as well. Canada first introduced the tax-free savings account concept in 2009. The act that created the tax-free savings account initially capped contributions at $5,000 per year. The contributions cap on the tax-free savings account was indexed to the inflation rate so that it could increase in subsequent years, and will be rounded to the nearest $500. Depositors are allowed to carry forward any unused room under the cap to future years. Withdrawals from a tax-free savings account may also be returned later without reducing contribution room. A tax-free savings account is distinct from a registered retirement savings account, another Canada-specific financial instrument, in that funds in the latter may only be used for retirement; funds in a tax-free savings account may be used for any purpose a depositor chooses. Withdrawals from a registered retirement savings account are also subject to taxes. However, unlike with registered retirement savings accounts, contributions to a tax-free savings account are not tax deductible.