By Miles Clyne
Starting in 2009, TFSA contribution room has been accumulating every year for Canadians. If at any time in 2009 you were 18 years of age or older, have a valid Canadian social insurance number and are a resident of Canada, you qualify.
If you qualified from 2009 to 2016, your cumulative contribution room is now $46,500.
The penalty for excess contributions to a tax-free savings account is 1% of the excess contributions per month.
Withholding taxes will be deducted from foreign dividends received in a TFSA, and these taxes are not recoverable.
Contributions are not tax deductible; however, all growth inside a TFSA and future withdrawals are tax free.
You can own any publically traded investment in a TFSA, including stocks, bonds, mutual funds, and ETFs. You can’t hold personal debt or some forms of partnerships.
How could you use a TFSA?
Money should be left to grow inside of a TFSA as long as possible. It is the best after-tax account for investing; all growth is tax free. This means it is ideally suited to be a long-term investment vehicle and for estate planning.
The least valuable use of a TFSA is as your personal ATM where you frequently withdraw from it.
TFSAs are not a substitute for RRSPs, as they are funded with after-tax dollars.
A good strategy to maximize your TFSA is to contribute sufficiently to your RRSP to generate a tax refund, which you can then contribute to your TFSA.
Give your spouse cash to contribute to their TFSA; any growth is not subject to income attribution rules between spouses.
Given TFSAs are ideally suited for long-term investing, investors should consider holding investments that have the greatest potential for growth inside a TFSA in order to maximize the tax free benefit. This is to ultimately provide higher after-tax returns and helps if an individual’s financial planning identifies the need for higher levels of growth.
If you are in a low marginal tax rate, consider using a TFSA rather than an RRSP if you believe you will ultimately be in a higher tax bracket. You can transfer the money to your RRSP when your income is higher to take advantage of the greater tax deduction. In the meantime, your money remains unrestricted inside the TFSA.
The bottom line is that TFSAs are great tools for now and into the future. In many planning cases we have been involved in, the TFSA ends up being an estate planning tool. Everyone who is eligible should investigate if a TFSA is suitable for their investment needs. For strategies and advice to your own situation and goals, do not hesitate to contact us.
This summary does not constitute tax advice and is for information purposes only. For more detailed information, please contact your tax advisor.
Information about the Tax-Free Savings Account are set out in the Federal Income Tax Act and administered by Canada Revenue Agency (CRA) and is subject to change.