Approximately three-quarters of Canadians have yet to open a tax-free savings account (TFSA), according to an RBC Financial Group survey conducted by Ipsos Reid.
More than 70% of Canadians know of a TFSA, but 51% have not opened one because they don't have the money to invest in it. About 22% said they didn't fully understand how a TFSA works.
TFSAs became available in January 2009 and provide Canadians an opportunity to save up to $5,000 a year in a registered account that can grow tax free. Anyone 18 or older with a social insurance number is eligible to open an account.
Canadians do not receive a tax deduction for contributing to a TFSA, unlike with an RRSP. However, gains from investments in a TFSA can grow without incurring any taxes, such as taxes on interest, dividends or capital gains. In addition, any withdrawals made do not affect your personal income tax.
Possible investments include GICs, mutual funds, stocks and bonds.
Of those who have opened a TFSA, the survey found about 36% said they were using it as an emergency savings fund, 31% were explicitly sheltering savings from tax and 30% were using it as a savings vehicle for long-term retirement savings.
However, only 44% of those with a TFSA have made the maximum $5,000 contribution and a third have contributed $1,000 or less. The average contribution was $2,998.
The top three investments being made in TFSAs are savings accounts (33%), cash (20%) and GICs (18%).