FWIW, the top FAQs of TFSAs

.

  By Guest Blogger Sinan Terzioglu

.

CRA data shows that in the 2019 tax year there were over 15 million TFSA holders but only 9% had maximized available contribution room. For those earning between $150,000 and $250,000 only 20% had maximized, and for those with income over over $250,000 only 30% had maximized available room. Not good enough.

The 2023 contribution limit is $6,500, up from $6,000 in 2022. The TFSA program became available in 2009 for all Canadians who are 18 years of age or older, have a valid SIN and are a resident of Canada. So long as someone has been a resident since 2009 the total cumulative room is now $88,000 or $176,000 for married couples.

Canadians owe over $2 trillion mostly in mortgage debt but many have overextended themselves to reach for property ownership and/or purchase/lease expensive cars while neglecting their savings. The potential lost opportunity cost of not taking full advantage of a TFSA cannot be overstated. For example, a mid-30s couple that have not contributed to their TFSAs and are in the market for a new home should seriously consider prioritizing TFSA contributions, then either aim to spend less on the cost of a home or hold off on the purchase for the time being.

Assuming they have $200,000 for a down payment, instead of allocating all available funds for the purchase of a home, if they contribute $50,000 to TFSAs today, add $13,000 annually and earn 6% per year they would have approximately $1,000,000 by the time they hit 60. This amount in TFSAs would provide annual tax-free income of approximately $50,000, so in addition to taxable government pension income and RRSP withdrawals, it would make a significant difference for retirement security.

Simply contributing to a TFSA is one thing but ensuring you have a proper investment plan is another. Many TFSA holders have been making the mistake of holding only cash and/or GICs in their TFSAs while some are essentially gambling in speculative securities with the hopes of making significant tax-free gains. Losses incurred in a TFSA cannot be used to offset capital gains in the future so once an investment suffers a permanent loss in a TFSA the contribution room is lost forever so it should be handled carefully.

It’s important to keep in mind TFSAs are intended for investing and growing savings over the long term. Ideally you should be buying, holding and periodically rebalancing. If you are frequently trading in your TFSA the CRA may consider your account to be “carrying on a business” and could tax the gains generated as income. The CRA has not provided guidelines about what defines frequent trading so it’s best to refrain from actively buying or selling inside your TFSA.

Frequently asked questions:

1.       If I withdraw from my TFSA can I re-contribute that amount?

Yes. If you withdraw from a TFSA the CRA allows you to re-contribute the amount withdrawn (contribution amount + any growth). However you cannot re-contribute the withdrawn amount until the following January otherwise you will be charged a 1% per month penalty on the over-contributed amount.

2.       Is there an upper age limit to be eligible to contribute to a TFSA? 

Unlike RRSPs which you cannot contribute to after December 31 of the year you turn 71, you can continue contributing to a TFSA for the balance of your life.

3.       Can I name a beneficiary for my TFSA?

As with RRSPs you can name a TFSA beneficiary which helps avoid probate fees after you pass away. Married and common law couples have the advantage of being able to name one another as Successor Holders which allows a surviving spouse to take over the TFSA with the assets still in it and keep all the tax-free room even if they do not have available TFSA contribution room.

4.       Does income earned in a TFSA and/or withdrawals impact my OAS, GIS and EI benefits?   

Federal income-tested benefits and credits will not be reduced as a result of the income earned in your TFSA or the amount you withdraw from it.

5.       Can I give money to my lower earning spouse and/or kids to contribute to their TFSAs and it not be attributable back to me as income splitting?

You are permitted to gift money to family to contribute to their TFSAs, however, contributions to their TFSAs must come directly from their bank accounts or a joint account held with you.

6.       Is it better to contribute to a TFSA or an RRSP?

For those fortunate enough the best approach is to contribute to both. In general, those earning incomes under $50,000 would be better off contributing to a TFSA while those earning higher levels of income can consider contributing to both by using tax refunds from RRSP contributions to contribute to their TFSA.

7.       Can I use assets in a TFSA as collateral for a loan?

Yes. Unlike with a RRSP, you can use the assets inside a TFSA as collateral for a loan.

8.       Can my spouse and I open a joint TFSA?

No, only individual TFSAs are available at this time.

9.       What happens if I over-contribute to my plan?

When you contribute to a TFSA the financial institution holding the TFSA sends the contribution information to the CRA which, unfortunately, has been taking upwards of a year to update its website. Over the last few years some have been surprised to learn they’ve over-contributed to their TFSAs because when they view their available contribution room on their CRA My Account page the contributions they have made in the previous year may not be reflected yet, leading to the belief they had additional contribution room. It’s important to ensure you keep close track of your contribution history and compare it to what the history on the CRA website shows.  If in doubt it’s best to contact the CRA for clarification.

10.   What types of investments should I hold in a TFSA?

Everyone’s goals and circumstances are different but for those that are investing for the long term and have a balanced and diversified portfolio with assets in other accounts such as RRSPs and non-registered accounts, the most ideal investments for TFSAs are diversified growth assets such as low cost ETFs tracking the Canadian, US and equity markets.

Sinan Terzioglu, CFA, CIM, is a financial advisor with Turner Investments, Private Client Group, Raymond James Ltd.  He served as vice-president of RBC Capital markets in New York City and VP with Credit Suisse in Toronto.

About the picture: “I too enjoy your blogs insights, humour and of course, love of our furry companions,” writes Lorrie. “This is my work from home companion and task master, rescue girl, Kitty (aka Chatty Cathy) She talks up a storm and can be a nice diversion. One benefit I found from our COVID years is working from home, especially with the rise in gas prices, insurance, etc.  There can be a bright side even in the darkest times.”