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Fund Library Q&A
Your questions about financial planning, investments, and portfolio management answered by an industry expert

By Robyn K. Thompson  | Thursday, April 19, 2018

Q – I’ve been looking for tax-efficient ways to save for a down payment on our first home. I’ve heard that a Tax-Free Savings Account is a good way to save for shorter-term objectives because any growth in the plan is tax-free, and so are all withdrawals. That seems almost too good to be true. Can you confirm how this works? – Kim T., Erin, Ontario

A – It’s true. The Tax-Free Savings Account (TFSA) is a great way to save, invest, and create tax-free growth. The Canada Revenue Agency (CRA) confirmed that the annual contribution limit for Tax-Free Savings Accounts (TFSA) will remain unchanged at $5,500 for 2018, bringing total contribution room available since the introduction of the plan in 2009 to $57,500 for someone who has never contributed to a TFSA.

You can contribute the maximum $5,500 annually, regardless of your income or pension plan or anything else. And there’s no cutoff date – you can contribute any amount at any time you want through the year, as long as you don’t exceed the maximum. You have to be over 18 and a have a valid Canadian Social Insurance Number.

If you don’t make a contribution in the year, you may carry that unused “contribution room” forward to be used in future years to use above and beyond maximum contributions. Of course, there’s no tax deduction for contributions as there is with a Registered Retirement Savings Plan (RRSP), but investment income generated within the plan – whether interest, dividends, or capital gains – is completely tax-free. As with RRSPs, you lose the benefits of the dividend tax credit, the capital gains exemption, and the use of capital losses within the TFSA.

Let’s say you are 30 years old today, you make $60,000 a year, and you are able to contribute $31,000 to your TFSA right away. If you continue to contribute $5,500 every year until you retire at age 65 (that’s $458.33 per month), at an average compounded annual rate of return of 8%, your TFSA would grow to $1,446,666! The interest, dividends, and capital gains generated in the TFSA are tax free. And all withdrawals are tax free. It’s the tradeoff for using after-tax dollars to make contributions.

Like any registered pension or retirement savings plan, the rules and regulations can get complicated.

First, you have to stick to “qualified” investments. Fortunately, there’s wide latitude in what is considered “qualified,” and investments are very much like those allowed for RRSPs: cash, stocks listed on designated exchanges, mutual funds and ETFs, bonds, GICs, and certain shares of small business corporations. Shares traded “over-the-counter” on dealer networks or exchanges are not qualified TFSA investments.

“In kind” contributions of qualified investments are also allowed (for example, stocks transferred from a non-registered account) in your TFSA. But any in-kind transfer will trigger a deemed disposition of the security at its fair market value when you transfer it from its source (e.g., an RRSP), which will be considered as the amount of your contribution. If there’s a capital gain, you will have to take 50% of that gain into income for tax purposes. But if there’s a loss on the disposition, you cannot use it to offset other gains.

While TFSAs are relatively simple on the surface, problems frequently arise if you start using your TFSA like a normal chequing account, dipping into it when you’re short of funds, and then topping up again when you’re flush. If you do this regularly, and don’t keep very close track of your transactions, you could end up with what the CRA calls “excess amounts” in your TFSA – that is, over and above the $5,500 annual contribution limit for the year.

The CRA levies a tax penalty of 1% per month based on the highest excess TFSA amount in your account for each month in which an excess exists. This means that the 1% tax applies for a particular month even if an excess amount was contributed and withdrawn later during the same month. The excess-amount tax kicks in on the first dollar of excess contributions.

If you’re a high net worth investor and your tax situation is more complicated than normal, or your investment strategy involves anything beyond simple asset allocations, consult with your financial advisor to ensure you make the most of your TFSA and avoid tax penalties.

Robyn Thompson, CFP, CIM, FCSI , is the founder of Castlemark Wealth Management , a boutique financial advisory firm specializing in wealth management for high net worth individuals and families. She is also listed as a MoneySense Approved Financial Advisor . Contact her directly by phone at 416-828-7159, or by email at for a confidential planning consultation.

Notes and Disclaimer

© 2018 by the Fund Library. All rights reserved. Reproduction in whole or in part by any means without prior written permission is prohibited.

The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned are illustrative only and carry risk of loss. No guarantee of investment performance is made or implied. It is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice. Please contact the author to discuss your particular circumstances.

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