UK Accounting Glossary
A tax-free savings account is a Canadian savings account that charges no taxes on earned interest, dividends paid by Canadian companies, or capital gains on stock issued by Canadian companies. Account-holders may also withdraw funds from a tax-free savings account without tax penalties. Any Canadian resident 18 years old or older with a valid social insurance number may open a tax-free savings account. Non-residents with property or social ties to Canada may be eligible for a tax-free savings account under some circumstances as well. Canada first introduced the tax-free savings account concept in 2009. The act that created the tax-free savings account initially capped contributions at $5,000 per year. The contributions cap on the tax-free savings account was indexed to the inflation rate so that it could increase in subsequent years, and will be rounded to the nearest $500. Depositors are allowed to carry forward any unused room under the cap to future years. Withdrawals from a tax-free savings account may also be returned later without reducing contribution room. A tax-free savings account is distinct from a registered retirement savings account, another Canada-specific financial instrument, in that funds in the latter may only be used for retirement; funds in a tax-free savings account may be used for any purpose a depositor chooses. Withdrawals from a registered retirement savings account are also subject to taxes. However, unlike with registered retirement savings accounts, contributions to a tax-free savings account are not tax-deductible.
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This glossary post was last updated: 5th February 2020.