The Tax-Free Savings Account (TFSA) has become a valuable tool for personal financial planning, but a new report suggests that they are underused and poorly optimized relative to their potential for use as tools for small business investment. Youri Chassin, a researcher with the Montreal Economic Institute, suggests:
Modifying the rules that govern TFSAs by allowing Canadians to invest in small businesses instead of restricting them to large ones would not only expand their savings options, but also improve the access that small businesses have to private funding.
In total, the value of Canadian TFSAs adds up to $151.6 billion, or about $13,000 on average per contributor. This stored value is made all the more significant when we consider that less than 20 percent of small businesses look to their family, friends or acquaintances as a funding source, despite facing barriers to access from major banks and traditional funding platforms.
What Do You Need To Know About TFSAs?
- They cannot be set up in the name of a business, only in the name of an individual.
- Withdrawals from a TFSA are tax-free and are added to unused contribution room starting the following year.
- Contributions to a TFSA are not tax deductible.
- The annual TFSA contribution limit for the year 2017 is $5,500.
- You can have more than one TFSA at any given time, but the total amount you contribute to all your TFSAs cannot be more than your available TFSA contribution room for that year.
TFSAs are also useful for the owners of small businesses as a financial management tool. Beginning entrepreneurs can save up cash, invest it, and withdraw the funds later to start their company, or use the account as an emergency source of cash to keep their business ticking along. It can also double as a retirement nest egg. Entrepreneurs typically pour a great deal of their financial resources into their business, and expect they will build up enough equity to later fund their retirement, but that may not always be the case.
Jamie Golombek of CIBC has also shown in a circa-2015 study that business owners who invest in aTFSA rather than leaving surplus funds in their corporation generally end up with more after-tax cash, especially when the time horizon is significant.
It remains to be seen whether financial policy and regulation surrounding TFSAs will change in order to better reflect their potential value for small business investment, but they remain useful even in the current economic and regulatory climate.