10 things you might not know about the TFSA

A Tax Free Savings Account (TFSA) can help you reach your financial goals. You can save up for a new house or put money away for retirement — all without paying tax on your gains or withdrawals that you make.

Despite the many benefits of this great savings instrument, which was introduced in 2009, only about half of Canadians have opened one. 

So, we thought we’d help spread the word by telling you 10 (useful) things that you may not have known about the TFSA.

1. A TFSA can hold lots of different investments

For many of us, a savings account is typically where our extra money goes at the end of the week — an institutional version of a piggy bank. Today, these accounts bring to mind safety and low interest rates. However, a TFSA isn’t just a vehicle to collect a measly amount of interest. You can put all sorts of different investments into one. These include exchange-traded funds, options, bonds, stocks, and mutual funds.

Financial institutions, such as banks, advertise low-interest rates for cash TFSAs. Unfortunately, when Canadians see a 2% rate, they might dismiss the power of a TFSA. In reality, Tax Free Savings Accounts act as a tax shelter, so you can put in higher-earning assets like stocks and not be taxed on the gains. (Just keep in mind, unlike a Registered Retirement Savings Plan (RRSP), you won’t get a tax refund for contributions). 

2. There's a limit on how much you can contribute

Every time you put money into the account, it's considered a contribution, regardless of how much money is in there. Look for your annual contribution limit on the notice of assessment that comes from the CRA when you file your taxes. Your total contribution limit is determined by how much you’ve put into your account since it was opened. 

The total amount that you can contribute in a given year depends on whether or not you have previously contributed to a TFSA. If you’ve never contributed to your TFSA, you’ll be able to contribute the current maximum cap, which as of 2019 sits at $63,500.

3. Your contribution room rises every year

The best part of a TFSA is that contribution limits have risen every year since it was created in 2019. It’s expected they will do so for the foreseeable future. Here’s a look at how the limit has grown since the TFSA was introduced. 

• $5,000 per year from 2009 to 2012
• $5,500 per year from 2013 to 2014
• $10,000 for 2015
• $5,500 per year from 2016 to 2018
• $6,000 for 2019

4. You can re-contribute TFSA withdrawals

If you take money out of your TFSA, you can put that same amount back in — as long as you stick to the rules. After all, Canadians have sometimes over-contributed and received penalties from the Canada Revenue Agency (CRA).

If you’re at your contribution limit, you cannot put back money you take out in the same calendar year. For example, if you took out $2,000 from your TFSA savings account in 2019, you’d have to wait until January 1, 2020 to put it back. 

Now, this doesn’t apply if you’re not at your contribution cap. For instance, if you still have $5,000 left to contribute in a year, and you take out $2,000, you can safely put it back later in the same year. Just keep in mind if you want to deposit even more money on top of that $2,000, your cap has shrunk to $3,000 for that year.

5. Your earnings are tax-free

Dividends, capital gains and interest earned in your TFSA are tax free. That applies to your withdrawals, too. If you have a high interest savings account outside of a TFSA, your financial institution will send you a T5 form, which will state your interest earned and you’ll have to report it to the CRA as income when tax time rolls around. 

You avoid that by putting your investments into a TFSA. 

6. You can have multiple TFSA accounts

You’re allowed to have multiple TFSAs with different financial institutions. However, you only have a single contribution limit. That means even if you have three different accounts, all of them will have a combined cap of $63,500 as of 2019. 

7. You can’t claim capital losses in your TFSA

The beauty of a TFSA is that any gains you make in it are not taxed the way they would be in other accounts. However, there is a downside, too. If your investments fall in value, you won’t be able to write off the losses come tax time. 

8. You can transfer your TFSA to your spouse tax free upon death

It’s important to think about what will happen to your savings when you pass. The good news is the TFSA is quite generous to your beneficiary in this regard. If you die, you can pass on your TFSA investments to your spouse — tax free. The amount you transfer also won’t count as a contribution to your spouse’s TFSA.

9. TFSAs are excellent for emergency savings

TFSAs are great because unlike an RRSP, you don’t get taxed on any money you withdraw. That means you don’t have to weigh the downside of pulling out money if you suddenly need to repair your car, for instance. This makes a TFSA an excellent tool to store your emergency savings in.  

10. Your TFSA can be used as collateral for a loan 

That’s right. If you’re in the process of getting a loan for something like a home renovation, a TFSA can help you out. While a bank isn’t required to accept your TFSA as collateral for a loan, it’s sometimes an option. That’s another thing that the RRSP can’t do, as the bank cannot seize assets from an RRSP if you can’t make your required payments.

Keep in mind, sometimes it’s a better idea to just use your savings from your TFSA to pay for your purchase, rather than adding debt by using your TFSA to help you get a loan. However, it’s important to be aware this option exists.

We’re grateful to our friends at Wealthsimple for lending their TFSA expertise to the LowestRates.ca audience. Wealthsimple is a Canadian online investment management service that provides smart, simple investing, without the high fees and account minimums associated with traditional investment management. It also offers high-interest savings accounts and commission-free trading.