The Tax-Free Savings Account works like the opposite of a Registered Retirement Savings Plan or RRSP. After-tax income of up to $5,000 per year can be placed into a TFSA. This money can then be withdrawn at any point of time, without penalty. Unlike RRSP’s, which must be withdrawn after the holder turns 71, the TFSA does not expire.
One mechanism in the design of the TFSA is the carry-over aspect. Any unused space under the $5,000 cap can be carried forward to subsequent years, without any upward limit. The TFSA also allows income splitting to an extent, because a higher-earning spouse can contribute to the TFSA of a lower-earning spouse.
This measure was well received by Canadians, with the C.D. Howe Institute saying, “This tax policy gem is very good news for Canadians, and Mr. Flaherty and his government deserve credit for a novel program.” It also earned praise from the Canadian Federation of Independent Business, Canadian Bankers Association, Bank of Montreal economist Doug Porter, the Canadian Chamber of Commerce, Canadian Taxpayers Federation and numerous other organizations.