Many Canadians have utilized the tax-free benefits of the Tax-Free Savings Account since it rolled out in 2009 — but others have yet to do so.
As a refresher, within a TFSA, you have the flexibility to invest in similar securities as you would in your Registered Retirement Savings Plan (RRSP) or non-registered investment account. Canadians can grow their investments and savings much faster because income and growth from a TFSA are completely tax-free.
The federal Department of Finance releases index adjustments for personal income tax and benefit amounts every year. The index rate is effectively the Consumer Price Index reported by Statistics sa国际传媒. Most personal income tax and benefit amounts are indexed to inflation annually.
The TFSA is slightly different in that the annual adjustments are only done to the nearest $500 increment. As a result, several years can go by without changes to the annual limit.
The TFSA limit for 2025 is $7,000.
For calculation purposes, the annual TFSA dollar limit was initially fixed at $5,000 and indexed to inflation for each year after 2009. The one exception to this was the one-time large increase in 2015.
The following are the annual contribution limits and cumulative limits:
|
Year |
Annual limit |
Cumulative limit |
|
2009 |
$5,000 |
$5,000 |
|
2010 |
$5,000 |
$10,000 |
|
2011 |
$5,000 |
$15,000 |
|
2012 |
$5,000 |
$20,000 |
|
2013 |
$5,500 |
$25,500 |
|
2014 |
$5,500 |
$31,000 |
|
2015 |
$10,000 |
$41,000 |
|
2016 |
$5,500 |
$46,500 |
|
2017 |
$5,500 |
$52,000 |
|
2018 |
$5,500 |
$57,500 |
|
2019 |
$6,000 |
$63,500 |
|
2020 |
$6,000 |
$69,500 |
|
2021 |
$6,000 |
$75,500 |
|
2022 |
$6,000 |
$81,500 |
|
2023 |
$6,500 |
$88,000 |
|
2024 |
$7,000 |
$95,000 |
|
2025 |
$7,000 |
$102,000 |
If you have never contributed to a TFSA, the cumulative limit is an important number. If you were 18 or older in 2009 and have never contributed to a TFSA, then you can now contribute $102,000.
Managed accounts
As a Portfolio Manager, we will always document how each client wishes to fund the TFSA, if applicable.
A Portfolio Manager has the discretion to do trades within an investment account; however, we do not have the discretion to move money between accounts. It is for this reason we will always have a discussion with clients and obtain an understanding of the method in which they authorize us to fund their TFSA accounts.
One of the reasons we need to document this conversation is to ensure the client does not make more than one TFSA contribution. In many cases we have verbal consent to fund the TFSA accounts from the non-registered account (see below).
sa国际传媒 Revenue Agency
In addition to having a clear discussion with the client regarding the funding of the TFSA, we also must determine the amount that they are able to contribute to their TFSA.
We have sa国际传媒 Revenue Agency (CRA) access for our clients to enable us to see the contribution limits and history of contributions. Any withdrawals done in 2024 can also be replenished in 2025.
If contributions have always been maximized, and there were no 2024 withdrawals, then the amount to contribute in 2025 is easy — it is $7,000.
Non-registered account
For clients who have a non-registered investment account, cash or securities can be transferred from the non-registered account into their TFSA.
Care should be taken prior to executing in-kind transfers to obtain an understanding of the tax consequences. If a security has a large unrealized gain, the proportionate part of the gain would be realized when the shares are transferred into the TFSA.
On the other hand, if you have an unrealized loss, the loss would be denied under the superficial-loss rules if transferred from a non-registered account to a TFSA. Another benefit of having a non-registered account is that the contribution can be done in the first couple of weeks of January each year.
Cheque or electronic transfer
For clients without extra funds within a non-registered account, the next easiest way to contribute to their TFSA is by writing a cheque or sending funds electronically.
Income splitting and gifting
TFSAs can be an effective way to split income among family members, such as your spouse or adult children. Although the TFSA account holder is the only person who may contribute to their TFSA, you may provide a gift to help them contribute to their TFSA. Income tax attribution does not apply on TFSA earnings as they are tax-free.
Registered Retirement Income Fund (RRIF)
If our clients have already reached the age where they are withdrawing funds from a RRIF, then it may make sense to do the withdrawal early in the year, versus waiting until the end of the year.
Before the TFSA, if clients did not need the RRIF withdrawal for cash flow reasons, it was typically advised to defer the RRIF payment until later in the year.
Growth in a TFSA is better than growth in a RRIF. Any growth in a RRIF is fully taxed when the funds are withdrawn. Any growth in a TFSA is not taxed.
If the RRIF payment is greater than $7,000, then we discuss with our clients about considering taking a partial payment early in the year to fund their TFSA if they do not have available funds in a non-registered account.
Contribute early and purchase equities
Our approach of contributing early in the year, and investing 100 per cent in equities, has resulted in TFSA accounts having substantial growth — all tax free!
As TFSA accounts have grown, the need for diversification within the account has grown as well. Historically, we have invested in individual Canadian equities in the TFSAs. When the TFSA was smaller, we avoided foreign equities. The reasoning behind this is that dividend income from a foreign country paid into a TFSA could be subject to foreign withholding tax.
If clients are looking to add a U.S. equity, in order to avoid withholding tax on the dividend income, they should pick an equity that is more focused on growth and does not pay any, or little, dividend income. The growth on the U.S. security is not taxed and can be another investment option to help maximize the tax-free growth.
When deciding what type of investments to hold within your TFSA we encourage our clients to know all investment options. The choice of investment options should reflect their investment objectives, risk tolerance, and time horizon. Once these have been determined, contributing early is advisable.
Kevin Greenard CPA CA FMA CFP CIM is a Senior Wealth Advisor and Portfolio Manager, Wealth Management, with The Greenard Group at Scotia Wealth Management in Victoria. His column appears every week at timescolonist.com. Call 250.389.2138, email [email protected] or visit .
