Flaherty unveils new tax-free savings plans

Finance Minister Jim Flaherty used his latest budget to unveil plans for new Tax-free Savings Accounts (TFSA), which will debut in 2009.

The accounts will allow Canadians 18 and older to invest up to $5,000 annually, and carry forward unused contribution room. There will be no lifetime contribution limit.

Unlike an RRSP, contributions to the new accounts will not be tax-deductible, but there will be no tax on investment income, including capital gains.

The government promised no clawbacks as a result of the accounts. Flaherty said investment income and capital gains earned in the tax-free accounts wouldn't affect income-tested benefits, such as the Guaranteed Income Supplement.

Another key difference from an RRSP is that people will be able to withdraw from a Tax-free Savings Account at any time. The funds could then be put back into the account at a later date without reducing contribution room.

Analysts said TFSAs make the most sense for people who can keep them open for many years.

"I'd say 10, 15, 20 years or more," accountant Tim Cestnick of The Waterstreet Group told CBC News. "It's the tax-free compounding over that period of time where you're really going to benefit."

Canadians will be able to make contributions to their spouse's TFSA and assets from the accounts will be transferable upon the death of a spouse.

The government said it expects seniors will receive about half of the total benefits of the TFSA as they currently have to begin drawing down their registered retirement savings when they reach the age of 71.

The government estimates that the plan will cost it $50 million 2009-10, and $385 million by 2012-13.

In addition, the Conservatives said Tuesday they are increasing the Guaranteed Income Supplement exemption to $3,500 from the maximum $500. Flaherty said the move would benefit lower-income seniors who are still in the workforce.