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Dale Jackson

Personal Finance Columnist, Payback Time


Canadians love their tax-free savings accounts. Nearly sixty per cent of us have opened a TFSA since it was introduced just over a decade ago. It’s one of the few ways average people can avoid paying tax on their investment gains.

But as simple as the TFSA might seem, there are restrictions: and not knowing them could be costly. Here are eight tips to make the best use of your TFSA.

1. Don’t expect a tax break like an RRSP

A recent TD Bank survey found 27 per cent of Canadians do not know the difference between a TFSA and a registered retirement savings plan (RRSP). The biggest difference is the ability to deduct RRSP contributions from taxable income until they are withdrawn. 

Returns on TFSA investments are tax exempt but contributions are not. 

2. Don’t keep it all in cash

The “savings” in tax-free savings account is misleading. Since only investment returns are tax exempt, it is pointless to contribute to a TFSA and not invest.  

3. If you’re maxed out, don’t recontribute in the same year you withdraw

Cash withdrawals from a TFSA are never taxed, but for the ten per cent of TFSAs that are maxed out it’s important to know that the contribution space will not be restored until the following calendar year. 

4. Don’t count on your financial institution to keep track of your limit

There are contribution limits on TFSAs and over-contributing could result in a penalty from the Canada Revenue Agency (CRA). 

Allowable contribution levels have crept up each year since it was launched in 2009. The contribution limit for 2020 is $6,000, bringing the total limit for anyone who was at least 18 years old in 2009 to $69,500. Inflation adjusted contribution limits are expected to continue rising in future years, although the government gives no guarantee and increases could end at any time.

Many Canadians contribute to their TFSA through more than one institution and it is the account holder’s responsibility to ensure they don’t exceed their limits. 

5. Don’t count on the CRA to keep an up-to-date tally of your contributions

The CRA provides TFSA limits in annual Notice of Assessments on individual tax returns, and for individual tax payers who set up a CRA online account. A word of warning: contribution limits posted by the CRA are usually for the previous year, so be sure to include contributions made in the current year.

6. Don’t expect to use capital losses against capital gains

Tax-loss selling is a popular strategy for investors who want to lower their tax bills by deducting capital losses from the sale of losing stocks against capital gains generated from winning stocks.

That only applies to non-registered accounts. Since capital gains are never taxed in a registered TFSA, there’s nothing to offset capital losses against. 

7. Don’t expect a tax break on U.S. dividends 

Non-Canadian dividends generated in a TFSA are subject to a withholding tax on behalf of the U.S. Internal Revenue Service (IRS). That includes the big U.S. blue-chip companies that Canadians love to own. It also includes U.S. mutual funds and exchange traded funds (ETFs), and even Canadian mutual funds and ETFs that hold U.S. equities. 

8. Don’t think of a TFSA as just a short-term savings tool. 

The TFSA is generally seen as a short-term savings tool to finance things like a new car, a pool or big vacation. That’s true, but it can also be an effective retirement savings tool in conjunction with an RRSP.

RRSP contributions and any gains they generate as investments are fully taxed when they are withdrawn. If those investments grow too much, retirees could be forced to make withdrawals in a higher tax bracket and even face Old Age Security (OAS) clawbacks.

Splitting retirement savings between an RRSP and TFSA allows you to limit RRSP withdrawals to the lowest tax bracket, and top-up required funds with non-taxable TFSA withdrawals. It’s a great way to keep more of your retirement dollars in your pocket.