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TFSA – 10 Years of Savings

Date posted: January 21, 2019

2019 marks the 10 year anniversary since the Tax Free Savings Account (TFSA) was implemented. During the first few years of the TFSA, there was limited benefits for most, but the increased contribution room each year has allowed for increased benefits to Canadians.

The TFSA provides a tax-sheltered savings vehicle for Canadian. It allows adult (18 or 19 depending on province) Canadians to contribute to their TFSA regardless of their income. Additional contribution room is added each year, allowing for larger tax savings year-after-year. The TFSA allows for the flexibility to make withdrawals with no tax-impact (unlike an RRSP) so you can use your money when you need your money.

The contribution limits by year are outlined below. If you were “of age” when the TFSA was implemented, then your cumulative contribution room would now be $63,500. Annual Contribution Limits:
  • $5,000 – Each of 2009-2012
  • $5,500 – Each of 2013-2014
  • $10,000 – 2015
  • $5,500 – Each of 2016-2018
  • $6,000 – 2019
If you do not use your room, there is no need to panic as the annual increases accumulate.

Strategies For Saving:
  • Gifts to Family: If you have used all of your TFSA contribution room and your spouse, parent, or child has not, you can gift them money for them to contribute to their TFSA. This strategy will save the family money. You may not contribute to their TFSA nor loan them the money to contribute – it MUST be a gift so make sure this is something you want to do before you do it
  • Name A Successor Holder / Beneficiary: For spouses, naming a successor holder is a must as it allows a surviving spouse to hold both their own TFSA as well as their late spouse’s TFSA. This will allow for additional tax-sheltered income for the life of the surviving spouse. Successor holders are only allowed for spouses, so naming a beneficiary should be done if you do not have a surviving spouse. Named beneficiaries help minimize probate fees and simplify executors responsibilities
  • RRSP Contributions To Generate Refunds: In some situations, people may decide to contribute to their RRSP instead of their TFSA to generate a refund on their taxes. They can then take the refund and contribute this to their TFSA.

Things to watch out for:

With all of these benefits, CRA has strict rules that must be followed. As long as you follow the rules, you have nothing to worry about. If you break any of the rules, you should look to correct it as quickly as possible since most of the penalties are charged monthly.
  • Do Not Overcontribute: Pay close attention to your maximum allowable contribution as anything in excess has a penalty of 1% per month for as long as the overcontribution remains. The ‘months’ are also calculated by any day in that month, so if you overcontribute on June 30 and correct the issue on July 1 you will be charged 2 ‘months’ of penalty.
  • Withdrawals Are Recognized By CRA Only On January 1: CRA only updates their records as of January 1 each year. This means that CRA will not acknowledge any of your withdrawals until January 1. If you have maximized your contributions and have to withdraw the funds on January 5th (eg to purchase a house), then you have to wait until January 1st of the next year to re-contribute the funds. If you know you will need to make a large withdrawal of TFSA funds early in a calendar year, it could be beneficial to make the withdrawal in the prior calendar year due to this rule.
  • Non-Residents: Non-resident Canadians are allowed to have TFSA accounts, but are not allowed to contribute while they are non-residents of Canada. Any of these contributions are treated as overcontributions and are penalized 1% per month.
  • Investing vs Trading: The TFSA is a savings account (as in the name). As such, CRA wants you to save (or invest) in this account – they do not want stock traders generating income in this account. The CRA considers people who trade stocks often as a person who is carrying on business within their TFSA (which is not allowed). They do not have any black and white rules for who they consider to be carrying on a business and who is just saving, but they have the authority to tax any income or gains within your TFSA if they rule you as carrying on a business in your TFSA.