6 Things We Think You Should Know About TFSAs

Date postedMar 20, 2023

The Tax-Free Savings Account “TFSA” was introduced in 2009 as a registered savings and investment vehicle to incentivize Canadians to save money. Now, it is widely used by millions of eligible Canadians to save for retirement or other financial goals.

1) Unlike an RSP, you do not need earned income to contribute to your TFSA. Each year Canadian residents over the age of 18 are given the same dollar amount of contribution “room” – starting from $5,000 in 2009, the yearly contribution room has grown to $6,500 as of 2023. If you don’t use your room in that year, the amount does accrue. In other words, if you were over 18 in 2009, you could have up to $88,000 in available room if you haven’t contributed yet. Your available room can be found on your CRA notice of assessment.

 

2) TFSAs are flexible. TFSA funds can be withdrawn anytime without incurring tax penalties or affecting your eligibility for government benefits. This makes TFSAs an ideal savings vehicle for both short-term and long-term goals. While it is usually recommended that this account be used for retirement, everyone’s financial plans and goals are different – there is no one size fits all approach, and sometimes life doesn’t go as planned. The only caveat to withdrawing is that you cannot recontribute those funds back into your account until the following year. One question we often receive is, “if my $10,000 contribution has grown to $12,000 and I withdraw, can I still contribute back the $12,000?”. The answer is yes; you can contribute to the same dollar value you withdrew. Although, where there is an upside, there is also a downside, and if your investments are down to $8,000 and you withdraw, you can only contribute the $8,000 back and not the $10,000 you initially contributed.

 

3) TFSAs can be used for retirement planning or helping your loved ones get a head start. You can give money to your spouse to contribute in their name so that you both can maximize your TFSA accounts. While you will not get the same tax break as a spousal RSP, the more funds you can allocate to tax-free growth and withdrawals, the better. You can also gift funds to your adult children to invest in their TFSA, which could help them save for a big purchase like a future home or get a head start with retirement.

 

4) TFSAs work well for any age. While there is a minimum age you can open a TFSA, there is no age limit like an RSP. We have helped clients aged 18 to those well into retirement open TFSAs. If you are over 71 and can no longer contribute to your RSP, the TFSA is a vehicle that can grow your investments tax-free and give you flexibility in retirement.

 

5) They also work well for any tax bracket. Whether you are in a high or low tax bracket, everyone can benefit from tax-free growth and withdrawals, so we always recommend maximizing your TFSA each year. If you’re in a low tax bracket and/or short on funds, the general rule is first to maximize your employer RSP matching if you have that available. Second, maximize your yearly TFSA contribution before contributing more to your RSP. This is because investors typically graduate to higher tax brackets as they move toward retirement. The RSP is a great tool when you get a higher tax deduction from your contributions.

 

6) The CRA has specific rules around day trading in a TFSA. This is important to understand if you want to avoid penalties or additional taxes. The CRA defines day trading as buying and selling the same security or securities during the same trading day in a TFSA account. Day trading is generally considered a high-risk strategy, and the CRA views it as a business activity rather than an investment activity. Any gains from day trading in a TFSA are subject to taxation as business income. However, the CRA does not have a specific rule regarding how many trades are allowed within a TFSA account. Investing, which is considered a long-term strategy where investors hold securities for an extended period with the expectation of generating a return, is allowable per the CRAs guidelines.

As always, if you have any questions or concerns, please contact your wealth counsellor for more information.