What’s a Tax Free Savings Account (TFSA)

A Tax-Free Savings Account is a Canadian government registered account available to all Canadians over the age of 18. Started in 2009, contributors (depositors) are permitted to deposit a government set amount of money every year into their TFSA account. The amount of the annual contributions are set by the Government of Canada annually. In 2022, the maximum contribution you can make to your TFSA is $6000.

The biggest advantage of a TFSA to every Canadian adult is that all gains within the TFSA’s grow completely tax-sheltered and all withdrawals are completely tax-free.

You can open a tax-free savings account at any bank, credit union or life insurance company or with your investment advisor or online investment platform.

Who Can Open a Tax Free Savings Account (TFSA)?

Any Canadian resident with a valid SIN and is 18 years or older is eligible to open a TFSA.

Individuals that are non-residents of Canada but who have a valid SIN and who are 18 years or older can also open a TFSA. However, any deposits made while a non-resident will be subject to a 1% tax for each month the contribution stays in their account.

How does a Tax Free Savings Account (TFSA) work?

The main benefit of a TFSA is that it’s the only legitimate tax shelter in Canada. That means money invested through a TFSA is sheltered from any taxes on any gains. You don’t pay any capital gains or income tax on any gains you make on the funds invested in your TFSA but with limitations. While your deposits to a TFSA don’t reduce your taxable income like a contribution to an RRSP however any gains you earn and interest you receive from GIC’s or bonds are not taxed either. 

Also when you withdraw from a TFSA you don’t pay any taxes of any kind on any withdrawals, like 

How can I use a TFSA for my child’s education?

While Canadian parents have used an RESP (Registered Education Savings Plan) to save for their children’s education, parents can also use their TFSA as an education savings plan and in most cases it’s actually better to use your TFSA for your child’s future education than an RESP.

Can I use my TFSA as an education savings plan for my child’s education?

Yes, you can use your tax-free savings account as an education savings plan for your child’s future and in many cases it’s more advantageous to use your TFSA than an RESP.

How RESP withdrawals are taxed?

While your money is in the RESP grows tax-free while it’s in the RESP. 

When your child begins their post secondary education any withdrawals they make from the RESP will be taxed.

It’s important to note that not all the withdrawals your child takes from the RESP are taxed on withdrawal. Money paid out of the RESP is called an Educational Assistance Payment and only the education assistance payment is taxed in the hands of your child (the student). The money that you have put in the RESP is returned to you, tax-free sine you paid taxes already.

Can I transfer my TFSA to my child when they are 18 for their education?

No. You cannot transfer a Tax Free Savings Account (TFSA) account or an RRSP account to your child when they are 18. Your child when they reach 18 can open a TFSA account however they can’t deposit more than the government allowable limit for that year. In 2022 the maximum contribution room allowed is $6,000. That means if a parents set aside $50,000 within their TFSA for their child’s education, they can’t simply withdraw $50,000 and deposit the $50,000 into their child’s TFSA account. 

Is it better to use my TFSA as an education savings plan for my child’s education?

Yes. As noted above. Your child will need to pay income tax on any Education Assistance Payments withdrawn from their RESP.

The withdrawals will also count as income to your child and may reduce the amount of student loans and grants your child could receive for their education. Ultimately this mean that the RESP which was designed to help them with their education may end up reducing the financial aid they can get to help with their education.

While any withdrawals your make from your Tax Free Savings Account are completely tax free. Neither you nor your child will have to pay any income taxes on any of the gains you had in your TFSA and you are free to help your child get any education they wish, not only those that are restricted to the RESP designated list.

Also any withdrawals you make from your TFSA will not reduce your child’s financial aid or any grants and scholarships they may qualify for. 

Is Participating Whole Life Plan a TFSA and Your Child’s Tax-Free Education Savings Plan and For Life?

Yes. Participating Whole Life Plans are a form of Tax-Free Savings Accounts for children. Since TFSA’s can only be opened by those over 18 Participating Whole Life Plans are the only tax-free investment parents, grandparents, aunt/uncles and legal guardians can open for children and grandchildren in Canada.

Participating Whole Life Plans can be opened where the plan is owned by the parents or grandparents but the child is listed in the plan as the insured. 

Since the child is listed as the insured the plan is opened in trust for their child’s future. That means the parents can at any time when their child or grandchild is over 18, can transfer the entire plan with all the cash values to their child, completely tax free. 

Unlike the TFSA, the parent isn’t limited to the annual contribution limit and if their child’s Child Plan has a cash value of $80,000, the parent or grandparent can transfer the entire plan with the $80,000 to their child.

Additionally, unlike the RESP or the TFSA, Child Plan™ participating whole life plan is your child’s tax-free Education Savings Plan and unlike the RESP there are no government rules on what your child can use the money for. That means unlike an RESP the use of the funds aren’t restricted to government approved education purposes only.

Unlike the TFSA, you’re not limited to how much you can transfer to your child for their education and you aren’t reducing your retirement savings.

With a Child Plan™ participating whole life plan, your child will:

• Receive an annual tax-free dividend every year from the day you open the plan for life
• The cash values are guaranteed and will grow tax-free throughout their life
• Your child has flexibility to use the cash values for any education around the world when they are 18, as well as to buy their first home and have financial security for life
• The cash values of their participating whole life plan is secure and never declines, no matter what happens in the stock market.
• Your child’s plan includes fully paid-up whole life insurance for your future generations.

Request a Child Plan™ Illustration and see how much cash value your child will have for their education and for life.