One of the greatest vehicles Canadians have to grow their wealth is a Tax Free Savings Account (TFSA). The TFSA began in 2009 for Canadian residents and every calendar year since, Canadian residents have had an opportunity to invest a growing amount into their TFSA.
| Year | Contribution Limit |
|---|---|
| 2009 | $5000 |
| 2010 | $5000 |
| 2011 | $5000 |
| 2012 | $5000 |
| 2013 | $5500 |
| 2014 | $5500 |
| 2015 | $10 000 |
| 2016 | $5500 |
| 2017 | $5500 |
| 2018 | $5500 |
| 2019 | $6000 |
| 2020 | $6000 |
| 2021 | $6000 |
| 2022 | $6000 |
| 2023 | $6500 |
| Total Possible Contributions | $88 000 |
What is a TFSA?
A TFSA is registered account meaning that contributions and withdrawals are reported to the Canada Revenue Agency. The TFSA is funded with after tax dollars and has no affect on your income tax.
Who Can Contribute?
To contribute to a TFSA an individual needs to satisfy 3 requirements;
- Be a resident Canadian citizen or permanent resident
- Be at least 18 years old
- Have a Social Insurance Number (SIN)
What are the pros of a TFSA?
Pro # 1 – Withdrawals are tax free and not counted as income . You keep everything your investment makes.
Example – You buy 50 shares of company X in 2010 at a price of $100 for a total of $5000. Today, those same shares are worth $500 in 2023. Your investment has grown to $50 000. When you decide to sell it, you don’t pay any tax on the growth in value of the investment. You keep it all!
Pro # 2 – When you withdrawal money from your TFSA, you get that contribution room back.
Example – You invest $10 000 into your TFSA and your remaining contribution room is $20 000. Your investment grows by 50% and is now worth $15 000. You need a new roof on your house and decide to withdraw $5000 from your TFSA. That withdrawal gets reported the CRA and they give your that contribution room back in the next calendar year. Your new contribution room is $25 000. Note: your contribution room can’t grow to an amount higher than the lifetime amount shown in table 1.
Pro # 3 – The value of your TFSA and withdrawals do not affect government benefits.
Example – you regularly earn $40 000/year, receive $15 000/year in child benefits, and you are a diligent saver. Your TFSA has grown over the years and you want to take the family to Disney World for a once in a lifetime trip. You withdraw $ 10 000 from your TFSA and have an amazing time. That $10 000 withdrawal is not added to your income for CRA purposes. Since it does not count as income, you will still receive your $15 000/year in child benefit because the CRA still counts $40 000 as your annual income.
What are the cons of a TFSA?
Con # 1 – If you lose money in a TFSA, you can’t deduct it as a loss.
Example – you invest $1000 in Company Y and it goes out of business. The stock price plummets to zero and your original investment is now gone. You can’t claim a loss on that money. That’s why it’s a good idea to invest in safer securities such as All in One ETFs and REITs in a TFSA.
Con # 2 – Contributions do not lower your income tax.
If you are looking to lower your income tax, you need to invest in an RRSP. TFSA contributions don’t affect your income tax in any way.
Con # 3 – You can’t invest into a TFSA until you turn 18 years old but you can still contribute the full amount for that year.
Example – Judy and Jane are best friends. Judy was born on January 1st, 2005 and Jane was born on December 20th, 2005. While they both turn 18 in 2023, they won’t be able to start investing into their TFSA at the same time. Judy can invest right away. She can invest all $6500 at once or spread it out over the year. But she can’t over contribute. Actually, she can over contribute but there are steep penalties. Don’t over contribute. Jane has to wait for her 18th birthday in December to begin investing. As soon as Jane turns 18, she can invest into her TFSA.
How to find out how much you can contribute to your TFSA?
Well, if you’ve never contributed to your TFSA, it’s easy. Find your birth year using the table below and match it to the corresponding contribution limit.
| Birth Year | Contribution Limit |
|---|---|
| 1900-1991 | $88 000 |
| 1992 | $83 000 |
| 1993 | $78 000 |
| 1994 | $73 000 |
| 1995 | $68 000 |
| 1996 | $62 500 |
| 1997 | $57 000 |
| 1998 | $47 000 |
| 1999 | $41 500 |
| 2000 | $36 000 |
| 2001 | $30 500 |
| 2002 | $24 500 |
| 2003 | $18 500 |
| 2004 | $12 500 |
| 2005 | $6500 |
But if you have made multiple contributions and withdrawals over the years it’s not that easy to determine. The easiest way to find it is on your latest notice of assessment. You might have a paper copy that the CRA mailed out to you. If you don’t have a paper copy, logon to your CRA account to view a copy. I highly recommend having an online account with CRA. It comes in handy and is easy to setup. Click on the button below to login or register a CRA online account.
How do I open a TFSA?
Two platforms that I use for my investments and highly recommend are Qtrade and Wealthsimple. Both have their pros and cons but I’ll leave that up to a future blog post.
Canadians pay a lot of taxes. We are taxed on our gross income and buy things with after tax dollars such as internet, cell phones, gas, alcohol, candy, etc. So when we get an opportunity to get something tax-free, we need to jump on it!