Corporations, Trusts and the New TFSA
More Information about Canada's New Tax-Free Savings Accounts
Nov 16, 2008
The Tax-Free Spending Account, or TFSA, is a new registered savings account which will be available to Canadians starting in January 2009.
Previous articles have covered the basics on TFSAs - what they are, how they are set up and administered, and how they might fit into your overall financial plan.
Summary - How TFSAs Work
In summary, the Tax-Free Savings Account (TFSA) is a registered account in which investment earnings, including capital gains, accumulate tax free. Canadian taxpayers over the age of 17 may contribute up to $5,000 each year to a TFSA. If a taxpayer does not use his or her contribution room in any given year, it may be carried forward to the next year allowing for a larger contribution.
Unlike the RRSP, contributions to a TSFA are not tax-deductible, and withdrawals from a TFSA are not reported as income.
In addition, TFSA withdrawals are not counted for any income-tested benefits, such as the Canada Child Tax Benefit or Goods and Services Tax Credit.
Total TFSA room builds up from year to year, and does not diminish as a result of withdrawals.
New TFSAs, Trusts and Corporations
One of the questions that Canadians have is whether a corporation or a trust can establish a TFSA. After all, corporations and trusts are taxpayers, too!
Can a Trust Establish a TFSA Account?
While the Canada Revenue Agency has not provided a definitive answer to this question, the new rules for TFSAs provide that an individual (other than a trust) who is 18 years of age or older and resident in Canada may establish a TFSA.
Accordingly, trusts will not be able to establish Tax-Free Spending Accounts.
More detailed information about the rules for tax-free spending accounts is available from the Canada Revenue Agency.
Can a Corporation Establish a TFSA Account?
Section 248 of the Income Tax Act defines an individual as "a person other than a corporation."
So, it seems clear that corporations will not be able to establish Tax-Free Spending Accounts, either.
Find Other Ways to Shelter and Minimize Tax
It seems that neither corporations nor trusts will be able, at this point, to establish tax-free savings accounts - neither falls into the definition of "individual" used by the Canada Revenue Agency to establish the criteria for these accounts.
As these accounts are still very new, it may be that the rules for their use may evolve over time. However, for now, Canadian trusts and corporations will have to continue to look for other opportunities to shelter and minimize income tax.
