Tax-free savings account a good option

January 8, 2009

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Jon Kesselman wasted no time taking advantage of the federal government’s new legislation permitting tax-free savings accounts (TFSAs).

Which is not surprising, considering the SFU public policy professor and Canada Research Chair in public finance originated the idea in 2001 when he and a co-researcher published papers at the C.D. Howe Institute and in the Canadian Tax Journal.

"We laid out an analysis and groundwork and made a positive case for a tax pre-paid savings plan," he says, and the new legislation is essentially the same.

Introduced on Jan. 1, Canadian residents aged 18 or older can deposit up to $5,000 annually into a TFSA. Investment earnings in the account are tax-free and do not affect entitlements to any federal benefit programs. Funds can be withdrawn at any time.

The new account has been widely cited in policy and financial circles as the most significant advance in Canada’s tax treatment of savings since RRSPs were introduced in the 1950s.

To help SFU staff and faculty take advantage of this new savings option, Sun Life Financial Canada is offering to set up TFSAs for those interested in contributing to any of the investment funds currently offered through Sun Life’s SFU Group RRSP program. Guaranteed Investment Certificates (GICs) are also available.

Alan Black, SFU’s manager of pensions and benefits, says the asset-management fees for Sun Life investment funds are about 1.5-percent less than those of retail financial institutions. As well, three- to five-year GICs can be collapsed after two years with no penalty and the funds reinvested to take advantage of better interest rates.

Banks will often charge a fee to collapse a GIC before its maturity date, says Black. He notes, however, that withdrawing funds from a Sun Life TFSA will trigger a fee per withdrawal.

And while capital gains on investment funds and interest on savings instruments such as GICs are all tax-free, Black says it’s not possible to claim capital losses at tax time. Employee contributions to a Sun Life TFSA will be done via direct debit from employees’ bank accounts and not through payroll deductions.

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