QUICK OVERVIEW: WHAT IS A TAX-FREE SAVINGS ACCOUNT (TFSA)?
First introduced in the 2008 Federal Budget by then Minister of Finance, Jim Flaherty, the TFSA was made available to Canadian residents over the age of 18 on January 1st, 2009. This was a timely introduction, allowing Canadians a flexible registered savings vehicle following the 2007 financial crisis.
One of the TFSA’s greatest features is its flexibility in terms of withdrawals. Withdrawals can be made at any time and without penalty. Because your contributions are made with after-tax dollars, any withdrawals are tax-free and do not affect your taxable income. This makes it particularly attractive for people who need cash flow but who do not want to add to their tax burden. It is also beneficial for those concerned about OAS clawback levels. Many seniors use the TFSA as a source of regular income to supplement their pensions.
WILL TFSA CONTRIBUTIONS REDUCE MY TAXABLE INCOME?
No, unlike a Registered Retirement Savings Plan (RRSP), the TFSA does not provide a tax deduction. Instead, it allows you to accumulate returns on your investments tax-free. In other words, the gains in the investments held in your TFSA are not taxed.
HOW DOES TFSA CONTRIBUTION ROOM WORK? DOES CONTRIBUTION ROOM ACCUMULATE AND CARRY FORWARD?
Yes, if you do not use your contribution room, any unused amounts will carry forward. As well, you can recontribute any withdrawals made in previous calendar years.
Amounts withdrawn can be recontributed the following calendar year or later – regardless of whether the withdrawal was capital or growth. For example, say you contributed $10,000 in your TFSA and you saw it grow over time to $16,000. You then decide to withdraw $6,000; which you not only earn tax-free but also can withdraw tax-free as well. And the following year, you can recontribute the $6,000.
WHERE CAN I FIND MY TFSA CONTRIBUTION ROOM?
If you do not already have a CRA account, you can sign up for one here My Account for Individuals – Canada.ca
Your account will give you access to CRA’s records on TFSA and RRSP contributions as well as instalment payments and other pertinent information regarding your income tax, but…
CHECK CRA’S DOCUMENTATION WITH YOUR OWN RECORDS!
CRA may not have the most recent information for your TFSA account. Financial institutions are required to submit annual TFSA information by the last day of February following the calendar year to which the TFSA contribution applies (if the last day of February falls on a weekend day, the due date is the following business day). Although CRA receives information by the end of February, they do not necessarily process it right away. When you log into your account the information may not be completely up to date. CRA states that you should “compare your records with the TFSA transaction information CRA has on file to make sure the information they have is correct.”
WHAT IS THE TFSA CONTRIBUTION LIMIT FOR 2023?
The indexation adjustment for personal income tax and benefit amounts was updated on November 14, 2022. The contribution amount allowed for 2023 is $6,500.
LIFETIME CONTRIBUTION LIMIT
If you are a Canadian resident you are eligible to start contributing to a TFSA in the year that you turn 18. The annual contribution room is indexed to inflation and rounded to the nearest $500 (with the exception of a brief increase to $10,000 introduced by the Conservatives in 2015). Unlike the RRSP, there is no maximum age limit for contributing to your TFSA. The current maximum contribution limit for 2023 is $88,000.
| Years | Limit |
|---|---|
| 2009, 2010, 2011 and 2012 | $5,000 |
| 2013 and 2014 | $5,500 |
| 2015 | $10,000 |
| 2016, 2017, and 2018 | $5,500 |
| 2019, 2020, 2021, and 2022 | $6,000 |
| 2023 | $6,500 |
| Maximum lifetime contribution | $88,000 |
HOW CAN I MAKE A TFSA CONTRIBUTION?
Making a TFSA contribution is easy. You can make an online bill payment to your TFSA account or set up a monthly pre-authorized payment. Contact us to discuss the best option for you.
WHAT HAPPENS WHEN I NEED FUNDS?
When you are ready to make a withdrawal from your TFSA, you simply need to provide instructions to your financial institution. If the TFSA is held with Fraser & Partners Investment Services of ACPI, all it takes is a quick call to us confirming the details of your withdrawal. It requires a few days to redeem the specific investment and then to send the cash to your bank account. You won’t be disappointed if you plan on 5-7 business days for the funds to land in your bank account.
HOW CAN I CORRECT A TFSA OVER-CONTRIBUTION?
If you accidentally make an over-contribution to your TFSA, CRA will send you either an “excess TFSA amount” letter or a “proposed TFSA return package”. You’ll first want to verify that CRA’s assessment is correct and then quickly remove the over-contribution. If your TFSA is held with us, contact us immediately. We will assist you by removing the over-contribution and helping you respond to CRA if you do not agree with their assessment. If the TFSA in question is held elsewhere, contact that financial institution as soon as the over-contribution correspondence is received.
WHY SHOULD I CONTRIBUTE TO MY TFSA?
There are not many opportunities to earn income tax-free and with 15 years of built-up contribution room, investing $88,000 tax-free is nothing to scoff at. As of 2019, Canadians had contributed $71,474,012 into their TFSAs with a current market value of $350,194,441! (source). Over time, TFSAs have become a key player in Canada’s financial and retirement plans.
TFSA CALCULATOR
HOW DOES A TFSA FIT INTO MY FINANCIAL LIFE PLAN?
If you don’t already have a strategy that incorporates a TFSA, contact your financial life planner to discuss how best to utilize this powerful tool for your unique circumstances.
The information in this commentary is for informational purposes only and not meant to be personalized financial planning advice. The content has been prepared by the team at Fraser & Partners from sources believed to be accurate.
