– 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
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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.