How does a tax-free savings account (TFSA) work?
Canadian residents age 18 or older can contribute up to $5,000 annually to a TFSA. Unused TFSA contribution room is carried forward and accumulates in future years.
Contributions are not tax deductible; however, investment income earned in a TFSA is tax-free and withdrawals are tax-free. Full amount of withdrawals can be put back into the TFSA in future years. Re-contributing in the same year may result in an over-contribution amount which would be subject to a penalty tax.
How does a registered retirement savings plan (RRSP) work?
A RRSP is a retirement plan that you or your spouse or common-law partner establish and contribute to. The maximum amount you can contribute is determined by your earned income from the prior year as well as deduction room carried forward from the prior year.
Deductible RRSP contributions can be used to reduce your tax. Any income you earn in the RRSP is usually exempt from tax for the time the funds remain in the plan. However, you generally have to pay tax when you cash in, make withdrawals, or receive payments from the plan.
How long should I keep my old tax records?
The Canada Revenue Agency (CRA) can ask to review an individual taxpayer’s tax return for up to three years from the date of assessment. For businesses, the CRA recommends you keep records and source documents for at least six years from the end of the last tax year to which they relate. However, some documents like an accounting ledger and corporate minutes need to be kept forever.