Young parents today have it rough. From the mind-blowing unemployment rate, huge student loans they are still paying off years after they graduate, and the highest cost of living to date, it’s no wonder they are having a hard time not only making ends meet but saving for their future and their children’s futures. But that doesn’t mean they can’t still achieve their dreams.

To help young people start saving when they’re younger, The Tax-free Savings Account (TFSA), was introduced in 2009, which allows young people to start growing their wealth tax-free as soon as they turn 18. TFSA lets you save and invest money without having to pay tax, even when you withdraw that money. Both parents and grandparents can assist their kids in starting this important journey, but only after they’re 18.

With a TFSA, you are allowed to hold your savings in the form of cash, stocks, bonds, guaranteed investment certificates, mutual funds, and exchange-traded funds. Depending on where you open your TFSA or the type of investments you hold, you could earn a gain on your investments or even lose capital. Unless you’re investing in a GIC you’re taking investment risks.

TFSAs are a federally governed government savings account that can only be opened by those who are 18 years and older. However, children in Canada under 18 can also have their own version of a TFSA – the Child Plan.  

Child Plan is a participating whole life plan and the only tax free savings plan parents and grandparents can open for children and grandchildren as young as 14 days old. From the day you open a Child Plan, your child or grandchild will earn an annual tax free dividend which will grow tax free for life and which parents and grandparents can transfer completely tax free to their child or grandchild anytime after they turn 18. 

Unlike the regular TFSA account for those over 18, there is no investment risk in a Child Plan Participating Whole Life. The cash value in your child’s Child Plan is not based on or exposed to the stock market and no matter what happens in the stock market your child’s Child Plan cash value is guaranteed to never decline once they receive their annual dividend.

To give your child or grandchild a head start and help your child save money now. Request a personalized Child Plan illustration now and see how much cash value your child could have if you started saving now, not when they turn 18. 

How Old Do You Have To Be To Open a TFSA?

By Canadian law, a person is eligible to open a Tax Free Savings Account when they reach the age of majority for their province. The age of majority is:

• 18 years in Alberta, Ontario, Manitoba, Quebec, Prince Edward Island, and Saskatchewan.
• 19 years in British Columbia, North West Territories, Yukon, Nova Scotia, New Brunswick, Nunavut, and Newfoundland & Labrador.

However, the TFSA is a federal program and, as such, anyone can open a TFSA when they turn 18.

That said, TFSA contributions begin to accumulate once they turn 18 years of age, no matter where a person lives in Canada. So, if you’re over 18 and let’s say live in Ontario, you can contribute $6000 in 2021 if you’re over 18 and that amount will be increased every year so keep an eye out each year for the maximum TFSA room.

However, if when you turn 18 you don’t have the money to start there is no need to panic that you missed that year’s contribution. One of the big advantages of the TFSA is that the government build in a catch up clause. If the year you turned 18 you didn’t have the $6,000 the following year you can deposit the prior year’s $6,000 and this year’s $6,000 allowing you to deposit $12,000 in that year.  However this, unfortunately, means you have lost an entire year of tax-free growth on your investments.

But here is the kicker- if you turn 18 on any day in December and open a TFSA that day, you only need to wait another few weeks and deposit the next year’s as well.

Can I Open a Tax Free Savings Account (TFSA) for my Child?

Unfortunately Not, Like an RRSP the account is connected to the contributor and the annual contributions are tracked by the Federal Government to make sure you and others don’t simply deposit $100,000 and try and earn tax free growth on that much money.

However, while you can’t open a TFSA account for your adult child, you can give them the funds to deposit into their TFSA. But be careful you don’t deposit directly to the account since the contributions are tracked to the person who made the deposit. Also please remember the TFSA account belongs to your child and not you. Which means that you have no say on how they use the funds.

Any interest or gains are tracked to the owner of the account and are completely tax free.  

What If Your Child is not 18 Yet?

TFSA minimum age is 18 years when a person is old enough to contribute and manage their own money. The parent can still help out, but it’s really up to the child to invest or use the money. This is the main difference between a deposit Tax-free Savings Account and an arrangement in trust.

Parents are usually given the option of opening a trust account to start saving for their child under the age of 18. This allows parents to put all the money they want for their child and control it until they reach a certain age. In the meantime, parents will be in charge of contributing, investing, and managing the money, and the child cannot touch it.

An alternative is opening a Child Plan with us. Since Child Plan™ is a Whole Life insurance plan, your child will be permanently covered. As their parent, you can control the use of the Child Plan ™ cash values even after transferring it to your child. 

Can You Be Taxed On Gains In Your TFSA?

Be careful how you invest in your TFSA. While your investment gains in your TFSA are not taxed, the government collects the data on how you invest your money. If you have a year with great investment gains of 20% the government won’t tax the account. If however they notice that for three years straight you have no employment income but are doing 120% investment gains on the funds in the TFSA account they may consider that you are churning your TFSA account via day trading and using those funds to live on. In this case they may tax the gains as a regular income.

TFSA Contribution Room

The maximum amount a person can put into a Tax-Free Savings Account is limited by the individual’s TFSA contribution room. An individual’s contribution room starts to accumulate the year they turn 18.

However, you can still contribute whatever amount you have, and it doesn’t have to be the maximum amount. Also, your unused contribution room can be carried forward to the following year. For example, if your contribution room is $6000 in each year and you only contributed $2,000 in 2019, you can contribute $8000 in 2020 to cover the balance in 2019.

So, what is your TFSA contribution room per year? Let’s find out below. 

A person is allowed to have multiple TFSAs, but the total amount saved in all of them has to be within the individual’s annual TFSA contribution room. Any amount above that will not only be taxed because it’s considered an over-contribution but the over-contribution will also have a monthly penalty of 1% on top of the taxes on any gains. This penalty will be applied until you withdraw the excess amount.

Other Options To Save For Your Child’s Future

You may not be able to open a TFSA account for your minor child, but you can still save money for their future and this option has multiple benefits. 

Start by opening a Child Plan for your child since it allows you to start saving money for your child as young as 14 days old. 

Child Plan “Participating” Whole Life provides your child an annual tax-free dividend every year for life, which they can use towards:

• Any education program around the world
• A down payment on their first home
• Funding their first start-up (if that’s their dream)
• Any financial need in their lifetime

In addition to the benefit of 18 years of tax free growth with no risks, you as their parent even after transferring the plan to them for their future, you can continue to control their access to their funds. With a Child Plan participating whole life plan parents will be required to agree to any withdrawals their child wishes to make and this control can last as long as you wish. If you don’t believe your child can manage the hundreds of thousands of dollars in the plan until they are in their 40’s, you have no legal obligation to remove the control.

Another great benefit with a Child Plan Participating Whole Life plan. Unlike an RESP which has an annual and lifetime maximum contribution room or a TFSA with an annual contribution room of $6,000 or an RRSP which is capped at 18% of your earned income. Parents who want to open a Child Plan, there is no maximum contribution they wish to make and the Child Plan is completely funded for your child’s entire life at year 20. That’s correct, after your baby turns 20, their plan is not only paid off but the cash value will continue to grow completely tax free for life.

To top it off, Child Plan can be opened by Grandparents (each grandparent can open a Child Plan for each grandchild) and it can be opened by aunts, uncles, godparents and legal guardians. And for grandparents, the ability to open a tax free savings plan for their grandchild which they can transfer tax free is an incredible gift for their future.

Final Thoughts

It’s important to know what options are available in Canada and seek financial advice when it comes to investing in your child’s financial future. While we have informed you on the details of a TFSA account for you as parents, we want to highlight that there is a more flexible tax free saving plan available for your brand new child that can give endless opportunities to save for their future. 

By reading this article you can tell that the few child’s savings plans available can be complicated or followed by strict limitations to adhere to in order to invest in your child’s future. 

Yet, the Child Plan is different. Child Plan allows parents and grandparents to stress less and focus more on building a stable foundation ahead for their family.

Request for a personalized Child Plan illustration, and get a customized saving plan for your kid to help secure them a brighter future.

The example below is a sample of the cash and life insurance values your child will have when you deposit $250 per month for 20 years. Contact insuranceforchildren.ca today to speak with a licensed Family Advisor.