Written on March 11, 2013 – 9:33 am | by Corina Weigl
Like contributing to your RRSP, establishing a Tax Free Savings Account (“TFSA”) as part of your overall savings goal makes a lot of sense for Canadian resident taxpayers.
For Canadian resident taxpayer there are many reasons why one would want to set up a TFSA. Perhaps the most important of those reasons is the fact that income earned in a TFSA is not taxable, which means that contributions within a TFSA will grow faster than funds invested alongside your TFSA. With the annual contribution room having been increased in 2013 to $5,500, the potential for tax-free growth that this vehicle can provide should not be overlooked. However, like other savings vehicles created for purposes of our Income Tax Act, the benefits do not always continue where a Canadian resident taxpayer may have ongoing tax obligations to another jurisdiction.
If you are subject to the tax regime of another jurisdiction, it is possible that the income earned in your TFSA will be taxable as it is earned. This may, for example, be the case if you are also a US citizen or green card holder (referred to as a US person) that is resident in Canada. The income earned in your TFSA may be taxable as it is earned. Leaving aside the taxes that may be owing to Uncle Sam, US persons will need to ensure that they are satisfying any ongoing reporting obligations.
For those US persons who reside in Canada they will need to pay attention to the US tax consequences of setting up Canadian tax vehicles. Speaking with their qualified advisors on these matters will be key to ensuring they are addressing both their reporting obligations and the differing tax consequences.