A Tax-Free Savings Account (TFSA) is a type of registered investment account that allows investors to grow their investment income and capital gains tax-free. TFSA contributions are not tax deductible, however withdrawals from the account are.
A TFSA can be used to save for a variety of short- and long-term goals, including a car, a home, a renovation, or retirement.
A TFSA can be opened by any Canadian resident with a Social Insurance Number who has achieved the age of majority in their province or territory. In Newfoundland and Labrador, New Brunswick, Nova Scotia, British Columbia, the Northwest Territories, Yukon, and Nunavut, the age of majority is 19. Contribution room, however, begins at the age of eighteen, regardless of where you live.
Stocks, options, exchange-traded funds (ETFs), mutual funds, bonds, and guaranteed investment certificates (GICs) can all be held in a TFSA as long as they are qualifying investments.
Only qualifying investments are permitted in a TFSA, according to the Canada Revenue Agency. In general, if a security trades on at least one exchange designated by Canada’s Finance Department as a Designated Stock Exchange, it is considered a qualifying investment. Holding non-qualified investments can have tax implications and may result in CRA penalties.
Many governments, including the United States, apply a non-resident withholding tax to foreign source income earned if you opt to hold overseas investments in your TFSA. Those taxes aren’t refundable, and they may lower your potential returns. Dividends paid on U.S. equities, for example, are subject to a 30% withholding tax, which can be lowered to 15% by submitting a W-8 BEN or W-9 form. For further information, consult your tax advisor.
No. If you trade frequently in your TFSA, such as dozens of times each year, the CRA may designate you as a day trader and classify your account as a business account. The CRA may impose taxes if a TFSA is regarded to be operating as a company.
- Withdrawals from a TFSA are tax-free, and no contribution room is lost.
- Because TFSA contributions are paid with after-tax dollars, they are not tax deductible.
- You are not subject to CRA attribution restrictions if you send money to your spouse to put into a TFSA.
The annual amount that individuals can contribute to a TFSA is determined by the federal government each year.
Using CRA’s My Account, you can check your contribution room. Note that the CRA account information are not updated in real time and are only updated once a year, around the end of February, to reflect your previous year’s transactions and current year’s monetary limit.
There is no such thing as a minimum or maximum income. Every year, every qualified person accumulates contribution room.
If I didn’t open my TFSA when it was first established in 2009, do I still have contribution room?
Can I use my unused contribution room in a future year if I don’t contribute the maximum amount this year?
Excess contributions will be subject to a 1% monthly penalty for each month the excess money remains in the account. The excess may also be penalized in terms of investment income and realized capital gains.
There is no lifetime contribution limit; all you have to do is keep under the maximum contribution limits for each year since 2009.
Yes. You can have one or more TFSAs with different financial institutions. Your total contributions, on the other hand, cannot exceed your personal contribution limit.
Yes. Any withdrawals you make during the current calendar year are deducted from your available contribution room. Beginning in the following calendar year or later, you can re-contribute the amount of your withdrawal.
You can take money out of a TFSA as often as you like. You can use the online funds transfer function in your RBC Direct Investing account.
No. For tax purposes, withdrawals are not considered income. They’re tax-free, and they have no bearing on federal income-tested benefits or credits like OAS, GIS, or the Age Credit.
Is it possible to re-contribute money from my TFSA later in the tax year if I make a withdrawal?
The amount of withdrawals can be re-contributed, but only until the next calendar year or later.
No. Money you provide to your spouse to put into his or her TFSA, on the other hand, is not subject to the CRA’s income attribution regulations.
Who gets the income if I donate money to my spouse to put into his or her TFSA? Me or my spouse?
Your spouse is the owner of the assets and the holder of the TFSA account, therefore any investment income and capital gains produced in the account are his or hers.
Yes. It’s possible that there will be tax implications. When you donate assets in kind, the assets are regarded to have been sold at fair market value (FMV). If the FMV exceeds the purchase price, you must record the capital gain on your tax return. However, if the property’s cost exceeds its FMV, you won’t be able to claim the resulting capital loss. The amount of your TFSA contribution will be equivalent to the property’s FMV.
- Note that many nations, including the United States, levy a non-resident withholding tax to foreign source income if you choose to hold overseas investments in your TFSA. Withholding taxes are non-recoverable and may affect your earnings. Dividends paid on U.S. equities, for example, are subject to a 30% withholding tax, which can be lowered to 15% by submitting a W-8BEN or W-9 form. For further information, consult your tax advisor.
No, the structures of a TFSA and an RRSP are not interchangeable, and you cannot move funds between them. To contribute to your TFSA with RRSP assets (either cash or stocks), you must first withdraw the RRSP assets (subject to any withholding taxes), shift the assets to a non-registered account, and then contribute to the TFSA. Consult your tax expert to ensure that this is the best option for you.
No. Inside the TFSA, you will not be taxed on investment income or capital gains. As a result, losses in the account cannot be used to offset taxable capital gains outside of the TFSA.
Follow the directions for completing an online application on the Open New Accounts page.
There are no minimum balance requirements in a TFSA account, but some products, including as GICs and mutual funds, may have a minimum investment requirement.
Yes, your TFSA can retain and settle trades in US dollars. If you have an RBC US dollar bank account, you can also contribute and withdraw in US dollars. It is the comparable Canadian dollar value that is documented in this circumstance for the purpose of reporting the amounts to the CRA.
Even if I don’t plan to trade in U.S. stocks, do I need to fill out a W-8 BEN form (Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting)?
This article’s content is offered for informational purposes only and does not constitute personal financial or tax advice. To address your individual financial and tax needs, please contact your own professional advisor.
In a TFSA, are ETFs taxable?
Dividends received into a TFSA from any of the above ETFs (because to their foreign status) are subject to a 15% withholding tax, except for XIC. For further information, see our TFSA article. If you’re using your TFSA as an emergency fund, you might want to keep some cash, T-bills, or GICs in it.
Can you keep your ETFs?
The holding period refers to how long you keep your stock. If you own ETF shares for less than a year, the increase is considered a short-term capital gain. Long-term capital gain occurs when you hold ETF shares for more than a year.
Why are capital gains not paid on ETFs?
ETFs act as pass-through conduits because they are formed as registered investment firms, and shareholders are liable for paying capital gains taxes. ETFs avoid exposing their shareholders to capital gains by doing so.
Is it possible to day trade in a TFSA?
How much trading in a TFSA is too much? In a TFSA, there are no set limits on trading. Making periodic modifications to a taxpayer’s TFSA portfolio is generally allowed.
What should I put in my TFSA account?
A tax-free savings account (TFSA) can hold a variety of financial assets, including cash, GICs, mutual funds, stocks, and bonds. Here are some TFSA investments that qualify:
Is there a withholding tax on ETFs?
When investors hold U.S. listed ETFs or stocks directly in a Registered Retirement Savings Plan (RRSP) or Registered Retirement Income Fund, they are normally exempt from U.S. withholding tax (RRIF).
Do you buy and hold ETFs?
Investing in buy and hold stocks is a simple and profitable approach that protects investors’ returns from market timing and stock selection. Accepting sub-average returns in a futile attempt to beat the market by investing in ETFs using a Buy and Hold strategy is an alternative to accepting sub-average returns in a futile attempt to beat the market.
What are some of the drawbacks of ETFs?
An ETF can deviate from its target index in a variety of ways. Investors may incur a cost as a result of the tracking inaccuracy. Because indexes do not store cash, while ETFs do, some tracking error is to be expected. Fund managers typically save some cash in their portfolios to cover administrative costs and management fees.
Are ETFs intended to be held for a long time?
Leveraged exchange-traded funds (ETFs) are designed for short-term trading. Long-term holding of a leveraged ETF can be extremely risky due to a phenomena known as volatility decay. This is true even in the event of a hypothetical “ideal” leveraged ETF with no expense ratio and daily replication of 3x the index!