The TFSA was introduced in 2009 to Canadians. It was a seemingly modest start. Allowing Canadians the ability to take $5,000 (on which they had already paid taxes) and place that money in any number of a broad range of investments in a tax-free savings account. If that initial $5,000 TFSA investment earned interest….no tax on the interest when the investment is inside a TFSA. If it earned dividends….no tax on the dividends when the investment is made inside a TFSA. If sold at a profit….no tax on the capital gain when the investment is made inside a TFSA.

With the passage of time, this savings and investment opportunity has become quite substantial. In a household with two adults age 30+, as of today, the couple could contribute $69,500 each to a TFSA with the knowledge that the entire sum should not ever be taxed as it earns and grows. The contribution room for an individual’s TFSA also increases annually. So, depending on the existence or absence of rule changes in the future, it is conceivable that an individual could be able to ‘tuck away’ $100,000 or more, forever sheltered from taxation in about 5 years.

If we agree that a TFSA should be on every Canadian investor’s radar, then it’s important that we’re aware of the rules, limitations, restrictions and never-do’s of a TFSA. 

  1. Register on CRA’s ‘My Account’ service and discover your TFSA contribution limit. This very strong recommendation is actually more valuable than simply confirming that CRA and you agree on your TFSA limit. It does provide that confirmation for you. It also provides much more information at your fingertips. Imagine a filing cabinet of your tax information you need not ever photocopy, store, discard. Do you need to prove your income for a loan? On ‘My Account’ you can find that information as confirmed by CRA. Need to know what capital losses you have? Whether or not you contributed to your RRSP? How about your filing history, RRSP and TFSA limits, all those and much more detailed information.
     

  2. If you make a withdrawal from your TFSA, know that you must wait for the New Year to replace that sum. A quick example should suffice. Say you’ve contributed your full limit to a TFSA, that being $69,500 as of today. If last week – on January 5th let’s say – you withdrew $20,000 from your TFSA, you would be able to replace that $20,000 not sooner than January 2021. Improper use of deposit/withdrawal limits causes unnecessary penalties. CRA charges 1%/month on the amount a TFSA holder is over the limit, so make sure you and your advisor are vigilant about this.
     

  3. Check your TFSA beneficiary. Have you designated a ‘beneficiary’ or ‘successor annuitant’ to your TFSA? This is an important distinction. For people who began a TFSA in 2009, 2010 or 2011, designation of a ‘successor annuitant’ was not an option. It is an option now though and is extraordinarily valuable for the partner of a TFSA investor, should the investor pass away.
     

  4. Ignore the name! The name suggests investors must open a ‘savings account’ for their TFSA. No such limitation exists. Want to own a stock in your TFSA? Yes, you can. How about a mutual fund, GIC, bond, pooled fund….(generally speaking), yes. Your options are broad when you invest in a TFSA. Make sure you have within it something which benefits from tax-free accumulation.
     

  5. For the advanced – if you are fully utilizing most of the room you have for RRSPs, TFSAs, LIRAs and savings beyond those limits, then you likely need to choose the home for certain investments. Where should my interest-paying bonds go? I have stocks which don’t pay dividends. Should I have those in my RRSP or in my non-registered account? Of course, you would be right to ask those questions. Ask us how to find the appropriate home for your earned money!


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