Newcomers to Canada looking to grow their wealth should consider opening a Tax-Free Savings Account (TFSA). A TFSA is a unique investment account that allows you to invest without paying taxes on your investment income, making it an excellent tool for long-term financial growth.
Much like a Roth IRA in the United States, contributions to a TFSA are made with after-tax dollars, meaning they are not tax-deductible. However, any earnings or income generated within the account, as well as future withdrawals, are entirely tax-free.
Why Should You Open a TFSA?
Using a TFSA can help you significantly reduce the taxes you pay on investment income over your lifetime. Consider this example:
- Martha contributes $7,000 to her TFSA in 2024.
- From 2024 to 2065, she continues to contribute $7,000 each year.
- Martha earns an average annual compounded return of 6%.
By the end of this period, Martha would accumulate investment returns totaling $868,333.78. Assuming her marginal income tax rate is 30%, she would save $260,500.13 in taxes on these returns (if taxed as interest income).
Who Can Contribute to a TFSA?
Any resident of Canada who is 18 years or older and has a valid Social Insurance Number (SIN) can open a TFSA. Your legal status in Canada—whether you’re a temporary resident, on a work or study permit, or a permanent resident—does not affect your ability to contribute. What matters is your residency status for tax purposes.
Contribution Limits and Rules
Each Canadian resident accumulates TFSA contribution room each year starting from the year they turn 18. For 2024, the annual contribution limit is $7,000. Since the TFSA was introduced in 2009, the limit has been indexed to inflation, and the cumulative contribution room for someone who was 18 in 2009 and has been a resident since would be $95,000.
You can withdraw funds from your TFSA at any time without paying taxes on the withdrawal. The amount you withdraw is added back to your contribution room for the following year.
Keeping Track of Your Contribution Room
It’s crucial to monitor your contributions to avoid exceeding your limit, as the Canada Revenue Agency (CRA) imposes a 1% per month tax on excess contributions. For instance, if George contributes $8,000 to his TFSA in 2024, exceeding his limit by $1,000, and then corrects this mistake three months later, he would owe the CRA $30 in taxes.
You can check your TFSA contribution limit on your CRA My Account, but remember that these figures may not always be up to date. It’s your responsibility to keep accurate records.
Investment Options in a TFSA
Despite the name, a TFSA is not just a savings account. While you can hold cash in a TFSA, the account is more beneficial for long-term investments like exchange-traded funds (ETFs), mutual funds, guaranteed investment certificates (GICs), stocks, or bonds. Holding higher-yielding investments in your TFSA maximizes its tax-free benefits.
Most financial institutions in Canada follow similar rules for what can be held in a TFSA as they do for a Registered Retirement Savings Plan (RRSP).
What Happens if You Become a Non-Resident?
If you leave Canada and become a non-resident, you can still keep your TFSA, and any income earned or withdrawals made will remain tax-free in Canada. However, you won’t accumulate contribution room during the years you are a non-resident, and contributions made while you’re a non-resident will be taxed at 1% per month.
Determining Your Residency Status
To determine if you are a resident of Canada for tax purposes, consult the CRA’s Income Tax Folio: S5-F1-C1: Determining an Individual’s Residence Status. You can also contact the CRA directly at 1-800-959-8281 (from Canada or the U.S.) or 613-940-8495 (from outside North America).
Where to Open a TFSA
Most Canadian financial institutions offer TFSA accounts. You can open one at any bank, credit union, or other financial institution that provides investment services.
What Happens to Your TFSA When You Die?
TFSA holders can designate their spouse or common-law partner as the successor holder of their account. The successor holder inherits the TFSA, and like the original holder, will not be taxed on any earnings or withdrawals.
Take Advantage of Tax-Free Growth with a TFSA
Opening a TFSA is a smart way for Canadian residents to grow their investments tax-free. Whether you’re new to Canada or a long-time resident, taking advantage of this opportunity can help secure your financial future. Contact Skynet Immigration and Consultants today to learn more about maximizing your financial opportunities in Canada.
