First things first: a tax-free savings account (TFSA) doesn’t actually need to be a savings account. We’re not sure who decided to call it that, but we prefer to think of a TFSA as a basket for saving or investing. You can pick what to put in your “basket” from an array of options — exchange-traded funds, guaranteed investment certificates, stocks, bonds, and, yes, actual savings. Whatever you choose, any gains you make from the investments in that basket are tax-free. That’s the beauty of a TFSA.
What’s that, you say? That sounds too good to be true? Well, it’s not. And there is no catch. But like anything the government creates, there are rules. Lots of them. Below are the ones that we think are the most important. Follow them, and let the TFSA bliss begin.
TFSA Contribution Rules
The maximum amount of money you can deposit into your TFSA each year currently stands at $7,000. This figure is called your TFSA contribution room. Thankfully, the total amount that you contribute is cumulative. This means that any unused contribution room will carry over from one year to the next, so the amount you can add to a TFSA will go up each year, regardless of whether or not you deposit money.
What if you never started a TFSA and want to catch up? There’s good news there too. Provided you were eligible and at least 18 years old in 2009 – the first year the TFSA was available — you could be able to contribute a grand total of $95,000. That’s the current lifetime maximum for a TFSA, as of 2024. If you already have a TFSA and have never taken out any money, you can keep adding to your account up until you hit that limit. And if you’ve withdrawn money from your TFSA in the past, you’ll get that room back. You just have to wait until the following year. So, for example, if you withdrew $10,000 from your TFSA in 2023 to use as part of a down payment on a home, assuming you are caught up on your TFSA contributions, you will be able to deposit $17,000 in 2024 — the $10,000 you borrowed from yourself, plus the $7,000 annual limit.
At any time over the course of a calendar year, if you contribute more than your allowable TFSA contribution room, you will be officially “over-contributing” to your TFSA, and you will be subject to a tax equal to 1% of the highest excess TFSA amount for each month that the excess amount remains in your account. So don’t do that.
There are a few ways to track your TFSA contribution room. Our favorite, no surprise, is the Wealthsimple TFSA tracker. But there’s also one on the CRA website. Another is the old-school DIY method, which is favoured by Barry Choi, the founder of Money We Have, who says:
TFSA Withdrawal Rules
For the most part, you can withdraw any amount of money you like from your TFSA. Withdrawals, excluding qualifying transfers and specified distributions, made from your TFSA this year will only be added back to your TFSA contribution room at the beginning of the following year.
Should you decide to re-contribute or replace the money you withdrew, within the same year, you can only re-contribute if you have available TFSA contribution room.
TFSA Eligibility
As long as your over 18 years of age and you have a valid social insurance number (SIN), you’re perfectly eligible to open a TFSA. A person determined to be a non-resident of Canada for income tax purposes can hold a valid SIN and be allowed to open a TFSA. However, any contributions made by a non-resident are subject to a 1% tax for each month the contribution stays in the account.
TFSA Investment Rules
For the most part, whatever is permitted in a Registered Retirement Savings Plan can go into a TFSA. That includes cash, mutual funds, securities listed on a designated stock exchange, guaranteed investment certificates, bonds, and certain shares of small business corporations. You can contribute foreign funds but they will be converted to Canadian dollars, which cannot exceed your TFSA contribution room.
Depending on the type of investment held in your TFSA, you may incur a loss in your original investment. Any investment losses within a TFSA are not considered a withdrawal and, therefore, do not reduce your TFSA contribution room.
Just because it’s called a TFSA doesn’t mean there’s absolutely no tax at all. Rules apply and there are some instances where tax does come into the equation. For example, when you hold foreign investments that pay dividends.
The dividends of foreign investments are subject to non-resident withholding tax. Like any tax, this eats into the amount you actually make. But that doesn’t mean you should rule out foreign dividend-paying investments. It’s important to have a diversified portfolio and this can mean having foreign dividend-paying stocks, particularly in a sector that might not be well represented on the Canadian Stock Exchange.
TFSA Stock Trading Rules
You may be surprised to learn that your trading activity could constitute a business, even if it’s done inside a TFSA. The tax rules mean that, should a TFSA operate like a business, it will have to pay income tax.
Recently, the CRA has focused their audits on taxpayers that are actively trading within their Tax-Free Savings Account.
The CRA takes a number of things into account when determining whether or not a TFSA is subject to income tax. These include the duration of the holdings, the frequency of the transaction, and your intention to hold investments for resale at a profit.
In situations where one or more TFSA taxes are applicable, a TFSA return must be filled out and sent by June 30 of the year following the calendar year in which the tax arose.
TFSA Rules on Death
Wondering what happens to you or a loved one’s TFSA when you pass away 😢? The types of beneficiaries for TFSA purposes are:
A survivor (spouse or common-law partner of the TFSA holder) who has been designated as a successor holder
Designated beneficiaries (for example, a survivor who has not been named as a successor holder), former spouses or common-law partners, children, a designated subsequent survivor holder who is the new spouse or common-law partner of the successor holder, and qualified donees
Determining the type of beneficiary can be affected by:
Designations that may have been made in the deceased holder’s TFSA contract
The provisions of the deceased holder’s will, if there is one
Provincial or territorial succession legislation
Buried (oof, we swear we didn’t mean that as a pun) in the boilerplate of the TFSA application form is the section where one names a beneficiary. You can name an individual as a beneficiary for an account right on the application form. However, it’s also possible to name your estate as the beneficiary and leave it to your will to say which account assets go to whom. While anyone can be designated as a beneficiary, only a spouse or common-law partner can be designated as a successor holder.
We reckon the best home for your TFSA is at Wealthsimple. We offer state-of-the-art technology, low fees, and the kind of personalized, friendly service you might have not thought possible from an automated investing service.
