Starting on January 1, Canadians were granted access to the single most important personal savings vehicle since the introduction of the RRSP.

The federal government’s brand new Tax-Free Savings Account lets Canadians 18 years of age and older set aside up to $5,000 every year in a variety of savings options and never pay tax on the income earned or on withdrawals. Introduced in Budget 2008 by finance minister Jim Flaherty, the new program provides greater flexibility than ever for saving for the future.

The federal government wants to help Canadian taxpayers better meet their savings goals. We believe that within the next 15 to 20 years, about 90 percent of Canadians will hold all of their financial assets in tax-efficient savings vehicles, either through existing tax-deferred plans or this new savings account. The Canada Revenue Agency is working with Canadian financial institutions to ensure seamless administration of these vehicles.

Feedback from the banks has been positive because they believe the Tax-Free Savings Account (TFSA) gives their clients more power to save money. The flexibility built into the program should appeal to all savers, whether they are saving for the short- or long-term. This is a new opportunity that deserves the attention of all Canadians, regardless of their tax rates.

The income earned within a TFSA and withdrawals from the account will have no effect on eligibility for federal income-tested benefits or credits, such as the Canada Child Tax Benefit, the goods and services tax credit, Old Age Security, or the Guaranteed Income Supplement. A TFSA can contain different types of investments, similar to those in an RRSP, such as mutual funds, listed securities, and guaranteed investment certificates.

Unused TFSA annual contribution room is carried forward and accumulates into future years. The full amount of withdrawals can be put back into the TFSA in future years, and contributions are not tax-deductible. Funds can be given to a spouse or common-law partner for them to invest in their own TFSA. Also, TFSA assets can generally be transferred to a spouse or common-law partner upon death.

Reducing the tax on savings is a powerful tool to support economic growth and improve the standard of living of Canadians at the same time. Since TFSA contributions are made with after-tax income, both contributions and earnings are tax exempt upon withdrawal. We hope you will take full advantage of the TFSA and the user-friendly benefits they have to offer.

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The audio version of Garry's January 12, 2009 op-ed column can be heard by clicking here