A Tax-Free Savings Account (TFSA) is a type of account where all your contributions, interest earned, capital gains and dividends are tax-free and can be withdrawn without any tax implications. You can hold a plethora of investments in a TFSA such as Mutual Funds, stocks, bonds, Real Estate, ETFs, securities and actual cash. The TFSA is available for individuals who are 18 years of age or above and are residents of Canada. The Tax-Free Savings Account can be used for any purpose. In this article, we will browse through the elements of the TFSA focusing on how Non-Resident Indians (NRIs) can benefit from this account. So, let’s begin!
Tax-Free Savings Account (TFSA) Highlights
- Tax-Free Savings Account (TFSA) is a type of tax-advantaged account that is available for the residents of Canada who are 18 years of age or older with a valid Social Insurance Number (SIN)
- It is called a tax-free account because you don’t pay any taxes on the investments made to this account or on the withdrawals
- The annual limit for contributions to a TFSA is C$6000 (in 2021)
Tax-Free Savings Account (TFSA) for NRI
Non-Resident Indians living in Canada can reap the benefits of TFSA. The account is available for Canadian Residents and individuals aged 18 or 19 (as per province) or above can contribute to the account and earn tax free interest on investments and contributions and enjoy tax free withdrawals.
The Canadian government introduced the TFSA as a way for its citizens/residents to save money. The uniqueness of this account is in the fact that you can hold various investment assets such as stocks, mutual funds etc. in the tax free savings account and get the benefit of not paying taxes on the capital gains or dividends.
TFSA Contribution Limit
The TFSA was introduced with an annual contribution limit of C$5000 in 2009. The limit has been altered more than once and the current TFSA contribution limit is C$6000. Let’s take a look at the year on year change in the TFSA contribution limit since 2009:
|Year||Limit (in C$)|
Points to Consider regarding TFSA Contribution Limit:
- The amount that you can deposit to your TFSA is called “contribution room”
- Unused contribution rooms can be carried forward to the next year. (e.g. you deposit C$3000 in 2019 then the remaining C$3000 can be transferred to 2020 making the limit C$9000 for 2020)
- The lifetime contribution limit for TFSA is simply the sum of all the limits every year. Therefore, if you were to open a TFSA now (in 2021), you can deposit up to C$ 75,500 in total contributions (given you were above 18 years of age and a resident of Canada since 2009)
- If you have deposited any money over the years (since 2009) then simply subtract that amount from C$75,500. That will be your lifetime contribution limit for TFSA
- The income earned by investments in your TFSA doesn’t impact your contribution room for current or future years.
The withdrawals made from a Tax Free Savings Account (TFSA) are added back to the contribution room for the next year. Let’s understand this using an example. If an NRI living in Canada contributes C$4000 to his TFSA in 2020 (limit for 2020 is C$6000) and then he withdraws C$3000 from his account. Now, since the maximum contribution limit is C$6000, he will only be able to replace C$2000 into his account (as C$4000 was contributed initially) and the remaining C$1000 can be re-contributed to the TFSA in 2021.
TFSA Rules regarding Contributions and Withdrawals
There are certain rules and regulations set by the Canadian government you need to take care of as an NRI in Canada:
- Overcontribution in your TFSA Account will result in a penalty of 1% of the excess amount contributed every month until it’s withdrawn.
- You need to wait for a year in order to earn your contribution room back if you want to replace your withdrawals
- You can’t do day trading of stocks in your TFSA
- The Canada Revenue Agency (CRA) sets the contribution limits for each year
TFSA vs RRSP: Tax-Free Savings Account vs Registered Retirement Savings Plan
TFSA and RRSP are both phenomenal accounts offered by the Canadian government to its residents. Let’s take a look and quickly compare the TFSA and RRSP to understand which one will be beneficial for which scenario:
|Tax-Free Savings Account (TFSA)||Registered Retirement Savings Plan (RRSP)|
|Can be used for any purpose||Modeled specifically for retirement savings|
|No tax to be paid on interest income, returns from investments and withdrawals||Contribution amount deducted from taxable income and withdrawals are taxed|
|Contribution room adds up year on year. You can invest up to C$75,500 in 2021 if you were above 18 and a canadian resident since 2009||There is a maximum contribution limit.The CRA sets an annual limit on the number of contributions each eligible taxpayer can make (limit is usually 18% of your income or $27,830 for 2021, whichever is less)|
|Preferable for people with income less than C$50,000||Preferable for people with income more than C$50,000|
TFSA Limit 2020 and 2021
The TFSA Limit for 2020 and 2021 is C$6000. The Canadian Revenue Agency (CRA) sets the TFSA Limit for each year.
TFSA Calculator: Tax Free Investments and Expert Assistance at SBNRI
An investment option like the TFSA in Canada is a very useful tool to earn tax free money. Many NRIs from India who are resident in Canada can utilize this account for lucrative returns on their contributions. Using the TFSA Calculator, you can evaluate the returns on the contributions made based on the instruments chosen for investment (like Mutual Funds, stocks etc.)
We at SBNRI, understand that there is a need for NRIs to access a platform where they can manage their taxation both in Canada as well as in India. This need is addressed by our team of experts who cater to all your needs around Banking, Investments, Taxation and much more in India and abroad under one roof. In this case, you can directly connect with our experts on WhatsApp using the button below to sort your needs both in India and Canada at one place. Also, visit our blog and Youtube Channel for more details.
Yes, TFSA contributions are allowed to be in US dollars. You can hold and settle trades in U.S. dollars in your TFSA.
Roth IRA is the TFSA equivalent in the USA.
Any individual that is a non-resident of Canada who has a valid SIN and who is 18 years of age or older is also eligible to open a TFSA. However, any contributions made while a non-resident will be subject to a 1% tax for each month the contribution stays in the account.
Yes. The contributions made to a TFSA are not deductible for income tax purposes. Any amount contributed as well as any income earned in the account (for example, investment income and capital gains) is generally tax-free, even when it is withdrawn.
Yes, dual citizens (US and Canada) can have a TFSA but it is advised to avoid the account in case of dual citizenship. While Canada and the U.S. have a tax treaty that generally harmonizes the way pensions and retirement accounts are taxed, this does not cover Tax-Free Savings Accounts: if you’re a U.S. person, investment gains earned within a TFSA are taxable in the U.S.
The United States imposes taxes on citizens regardless of where they live and where they earn their income. Dual citizens who are living abroad may owe taxes to both the United States and the country in which they earn their income. Generally, the instrument of DTAA is used to avoid double taxation. Residual taxes however, must be paid.