CELIAPP 101

On 1 April 2023, the Tax-Free Savings Account for First-Time Home Buyers (TFSA) will come into effect. The purpose of this publication is to inform readers about the basics of this new plan and to highlight its main differences from the HBP, turning you into a financial expert at your next family reunion.

In short, the TFSA has some of the advantages of the RRSP and TFSA combined. Let's take a closer look at these features and a few others.

Opening

To be eligible to open a TFSA, the individual must be a Canadian resident of at least 18 years of age and not have owned a home at any time during the previous 4 calendar years or during the current one. This ownership test applies not only to the person in question, but also to their spouse or common-law partner at the time the savings vehicle is opened. It is also possible for a taxpayer to own more than one TFSA. However, they must share their different contribution limits.

Cotisation

This savings plan has an annual contribution limit of $8,000 and a lifetime limit of $40,000. It is possible to contribute more than the $8,000 annual limit in a given year if the taxpayer has not optimized his or her previous annual contributions. Taxpayers can carry forward unused contributions from the current year, up to a maximum of $8,000. However, this carry-forward right begins only after the TFSA has been opened.

Let's take an example to clarify:

Catherine opens a TFSA in 2023 and contributes $2,000 during the year. In 2024, her maximum annual contribution limit will be $14,000 ($8,000 annual limit + $6,000 deferred contribution amount). During that same year, Catherine still makes an annual contribution of $2,000. In 2025, her maximum annual contribution limit will be $16,000 (i.e. $8,000 annual limit + $8,000 deferred contributions). Finally, if Catherine had opened her first TFSA in 2025, her maximum contribution room for the year would be $8,000 ($8,000 annual limit + $0 deferred contributions).

Transfers

Individuals can transfer amounts between their RRSP and their TFSA. When the transfer is made from the RRSP to the TFSA, the amount in question reduces, dollar for dollar, the annual contribution limit to the TFSA. The amount of the transfer is tax-free, but it is not deducted from the contributor's income because the contributor already received a deduction at the time of the RRSP contribution.

When the transfer is made from the TFSA to the RRSP, no reduction is taken into account. It may therefore be possible for an individual to transfer more than $40,000 to their RRSP tax-free, even if they have no RRSP contribution room.

Deduction

As with an RRSP, tax deductions do not have to be used in the same year as the contributions are made. What's more, only contributions are deductible. No deduction is possible on a transfer.

Retreat

When a TFSA withdrawal is made to purchase a first property, the withdrawal is considered eligible.¹ This means that the withdrawal is tax-free.

To meet the eligibility criteria, the taxpayer must, among other things, have been a Canadian resident throughout the TFSA opening period and meet the ownership test described in the "Opening" section. However, at this stage, only the taxpayer in question is targeted, not his or her spouse or common-law partner.

Closing

Unlike an RRSP or TFSA, the TFSA has a maximum lifespan of 15 years. In fact, this savings vehicle must be closed at the end of the year following the occurrence of one of the following events:

• The 14th anniversary of the first TFSAAPP opened by the taxpayer

• The attainment of age 70 by the taxpayer

• The first qualifying withdrawal made by the taxpayer

In addition, when a taxpayer has more than one TFSA, the maximum 15-year participation period begins when the first account is opened. Once the participation period has elapsed, the individual will not be able to open another TFSA for the rest of his or her life.

CELIAPP and RAP

Although it is possible to make HBP and TFSA withdrawals in relation to the purchase of the same property, there are some important distinctions to be made. When it comes to withdrawals, the TFSA-APP has no limit, whereas the HBP is limited to $35,000. A person who maximises his or her TFSA contributions could withdraw a much larger amount tax-free, depending on the return obtained.²

What's more, with a TFSA, there are no repayments to be made after the withdrawal. This represents a permanent tax exemption. In the case of the HBP, the amounts must be repaid at a rate of 1/15 over 15 years. In the event of default, the amounts will be included in income for the year in question. If the repayment is made properly, the amounts will be taxed when they are withdrawn from the RRSP at retirement.

Abbreviations

TFSA | Tax-Free Savings Account

ITA | Income Tax Act (Federal) ³

HBP | Home Ownership Plan

RRSP | Registered Retirement Savings Plan

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¹ Various criteria similar to the RAP must also be met.

² Lifetime contribution limit for the vehicle + return on investments in the plan over 15 years.

Income Tax Act, R.S.C. (1985), c. 1 (5th Supp.)

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