Tax Free Savings Account (TFSA): Canadian Taxation - Assignment Example

Tax-Free Savings Account (TFSA): Canadian Taxation Introduction Taxation is a vital financial instrument in the hands of the state. In the realm of the developed economies, taxation is still a debatable subject. Is it fair to tax the people at all? Or should it be levied at higher rates to mobilize the economy more? How can the society at large be benefited by taxation? These are, perchance, the most debatable questions that one may ask in regards of taxation. Every citizen has the right to know that when and why she or he would be taxed by the government.

Exemptions, therefore, are rather targeted to obtain more transparency in the national economy. However, economic growth, government expenditure, and the taxes appear to be rather interrelated, and sometimes, intermingled. (Bania, N. et al, 2007). Taxation and TFSA The tax rates on one’s income may be decided on her or his ability to earn. The individual’s IQ, educational degrees, age, etc. may be considered as the important factors in this regard. “In Western Europe and America, tax rates on both high and low incomes are widely and lengthily discussed.

” (Mirrlees, J. A., 1971) Contextually, according to Statistics Canada, savings certificates, interest on bonds, dividends, etc. may be scrutinized under taxable income (2006 Census : Income and Earnings Reference Guide, 2006). In such a state of affair, Tax Free Savings Account (TFSA) appears to be very soothing from the viewpoint of a tax payer. TFSA is a supple investment account, which can help one effectively in the long run. The investment income at a TFSA is not taxed; it doesn’t matter whether the account holder is earning dividends, capital gains, or some sort of interest.

Any resident of Canada aged 18 years or older, who has a Social Insurance Number, can apply for a TFSA. Benefits of TFSA The major benefits entailed in TFSA are enlisted below: 1. Investment income to and withdrawals from the TFSA are exempted from tax. 2. There is the benefit of “carrying forward” the unused contributions to accumulate in the future years. 3. TFSA supports a wide and supple assortment of investment options including bonds, mutual funds, and Guaranteed Investment Certificates. 4. The account holder remains eligible for the different welfare schemes like Guaranteed Income Supplement, Canada Child Tax Benefit, Old Age Security, etc. (tfsa.gc.ca, 2010) Conclusion TFSA cannot be put parallel to the contemporary registered saving schemes like Registered Education Savings Plan (RESP) and Registered Retirement Savings Plan (RRSP).

Actually, TFSA is targeted to play a complementary role. In other words, tax exemptions must be a contrivance of redistribution of resources across the people (Bonenberg, A. L. et al, 2008). TFSA aids in this by rendering flexible, easy, and tax free contribution and withdrawal opportunities. In these days of global market volatilities, we have encountered several financial challenges. People must be relieved from the increasing economic uncertainty and pressure. Although Canadian economy has recovered from the global recession, it is important to bypass the complexity of differentiating between debt and equity investments (Manning, B., 1982). TFSA offers the Canadian citizens an easier way to organize their savings in the contemporary economic environment.

References 2006 Census : Income and Earnings Reference Guide. (2006). Statistics Canada: Canada's national statistical agency / Statistique Canada : Organisme statistique national du Canada. Retrieved June 5, 2010, from http://www12.statcan.gc.ca/census-recensement/2006/ref/rp-guides/income-revenu-eng.cfm Bania, N., Gray, J. A., & Stone, J. A. (2007). Growth, Taxes, and Government Expenditures: Growth Hills for U.S. States. National Tax Journal , 60, 193-204. Bonenberg, A. L., Hansen, M. I., & Sorensen, P. B. (2008).

Individual Savings Accounts for Social Insurance Rationale and Alternative Designs. International Tax and Public Finance, 15, 67-86. Manning, B. (1982). Hyperlexis and the Law of Conservation of Ambiguity: Thoughts on Section 385. Tax Lawyer, 36, 9. Mirrlees, J. A. (1971). An Exploration in the Theory of Optimum Income Taxation. The Review of Economic Studies, 38, 175-208. Tax Free Savings Account (TFSA). (n.d.). Tax Free Savings Account (TFSA). Retrieved June 5, 2010, from http://www.tfsa.gc.ca