Once you’ve decided you want to invest in a tax-free savings account (TFSA), the first step you must take is to decide which type of TFSA you want: a savings account, GIC TFSA, mutual fund TFSA or self-directed TFSA. As soon as you know that, you then need to go about the process of actually opening the account. Fortunately, despite their seemingly complicated nature (which is really not so complicated at all), opening a TFSA is very straightforward. Here’s all you need to know about the process.
Who qualifies to open a tax-free savings account?
Before attempting to open a TFSA, you have to make sure you actually qualify to do so. All Canadians 18 and over who have a social insurance number (SIN) may open a TFSA. The only caveat to this is that, in certain provinces, you must be 19 years of age to enter into a legal contract, which includes that of a TFSA. For people in this situation, they cannot make an actual contribution to their TFSA while they are 18, but they do receive the contribution room for that year.
Residency is also important, when it comes to TFSA qualification requirements. If you are deemed to be a non-resident for tax purposes by the Canada Revenue Agency (CRA), you may still open a TFSA, but any contributions made while you are a non-resident are subject to a 1.00% monthly tax. If you think you might be a non-resident for income tax purposes, see the CRA’s website for more information.
What is needed to open a tax-free savings account?
Opening a TFSA is very similar to opening a bank account. You usually need to provide two pieces of identification, in order to apply.
Where can tax-free savings accounts be opened?
TFSAs can be opened in-person at banks, trust companies, insurance companies and credit unions/caisses populaires in Canada. They can also usually be opened online, depending on which lender or investment brokerage you choose to invest with.
Read the contract before you sign the tax-free savings account agreement
As we said above, when you open a TFSA, you are entering into a legal contract. As part of this agreement, you must provide information about yourself, including basic identifying details such as address, name and date of birth. Make sure everything you include is 100% accurate, as this information is sent to the CRA.
In addition, you will be asked to specify how much risk you are willing to take with your TFSA, as well as state your level of investment knowledge. This is required by the TFSA issuer to satisfy the “Know Your Client” regulations. In a nutshell, the issuer is not supposed to open a TFSA that can be used for high-risk, speculative investments for someone who either does not want to take on such risk or is not qualified to do so.
As with any legal document, it’s a good idea to read your TFSA agreement before signing it. With certain lenders, you may be subject to things like account and transaction fees. In fact, just having a TFSA with some lenders might mean that you have to pay a yearly “maintenance fee” to keep it open. It’s best to know what you are agreeing to before signing, so you can consider alternative TFSA issuers if necessary.