TFSA

For most people, there are relatively few tax breaks.  A TFSA (Tax Free Savings Account) is one you can count on, and it is often overlooked.

For someone eligible since inception in 2009, the cumulative contribution amount is $102,000, plus another $7,000 for 2026.  Unsure of your TFSA contribution room, you can find out from CRA.

The main requirements are simple: be age 18 or older, have contribution room, and be Canadian resident.  Don’t over-contribute, or you will suffer a stiff penalty of 1% per month.  Contributions are based on the calendar year.

TFSA planning is easy. Here are the main features:

  • Income and capital gains earned in the plan are tax-free

  • You can invest in stocks, bonds, GIC’s, and mutual funds but not private investments

  • You can withdraw funds tax free at any time if you need money and recontribute next year up to the amount you took out plus your contribution room.

  • Nothing stops you from giving money to people age 18 and older who then put the money in their own TFSA (but they need to confirm their contribution room)

  • No deduction is given for a TFSA contribution (it is not like an RRSP in this aspect)


Imagine you are a top-rate taxpayer with cash and investments but no TFSA.  You have a spouse and three children (who were age 18 or older in 2009).  This coming January you can shed $545,000 of your investments into 5 TFSA accounts.  That is $109,000 each for you and your spouse, plus the same amount to each of three children.

 

Investment Strategy

There are two main investment strategies to consider for a TFSA: the highly taxed income strategy and the growth strategy.

The highly taxed income strategy is to take investment income that is taxed in the worst way, interest income, and have that earned in a TFSA tax-free.

The growth strategy recognizes that the TFSA limit is quite low, so make the TFSA fund grow as much as possible with carefully chosen growth-oriented equities.  Of course, here there is no guarantee of the outcome.

Most people will go with the first strategy. 

While the tax savings from a TFSA may not appear large, it is easy, low cost, low risk and the benefit renews year after year.

Successful tax planning does not need to be exotic.  A simple strategy can also be rewarding.

Jane Zhao