Demystifying the TFSA
How do I maintain the integrity of my TFSA?
Ah, the mystery of the TFSA… It’s like a secret code for something magical and we all know it’s special. But why? You aren’t alone if you don’t know what it is or how to use it. It’s your right as a Canadian to use the TFSA to your advantage.
TFSA stands for Tax Free Savings Account, also known as a: NO TAX ZONE.
Yes, it sounds too good to be true, but it is not! A Tax Free Savings Account is a place where you can park your cash without incurring taxes: sans tax. Let’s repeat: no tax! The TFSA was introduced by the Canadian Government in 2009 to encourage Canadians to save and invest.
TFSA Restrictions: a Reality Check:
- No tax on withdraws, potential tax on over-contributions. You may withdraw your money, tax-free at any time. You do not pay tax on withdrawals, even if you doubled your money.
- There is a limit to how much you can contribute.
- If you overcontribute, you will pay tax and a penalty of 1% per month on the excess.
- You need to have turned 18 and have a valid social insurance number.
- You need to establish residential ties to Canada.
I opened up a TFSA, now what?
Now that you opened a TFSA, you need to fund it with some money. It’s like a piggy bank or any other account that you have opened at a financial institution. There are exceptions, but for the majority of Canadians who use this account properly, you can rest assured that any money going into the TFSA can be invested into ETFS, Mutual Funds, GICS, Stocks and or bonds.
What are the benefits of the TFSA, eh?
- With few exceptions, you can invest to earn capital gains, dividends and income tax-free.
- Withdrawals are tax-free.
- Won’t affect other government benefits, such as retirement income, OAS, CPP etc.
- You can hold: Stocks (Canadian and International) listed on a designated stock exchange, Bonds, Options, Mutual Funds, GICs, Cash, Gold and Silver Bars, certain shares of small business corporations.
- You can name a beneficiary.
For a full list of TFSA particulars, visit: https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/rc4466/tax-free-savings-account-tfsa-guide-individuals.html#P44_1121
What’s the point of a TFSA?
It’s to get you to invest into the stock markets and to fund business operations so that you can contribute to our growing economy. When you invest money into businesses by buying shares or issues of a company, you contribute to jobs, products, services and you raise the GDP of our Country and raise the standard of living for Canadians, everywhere. You also depend less on government resources.
What if I liquidate my TFSA to buy something?
If you withdraw all of your money, you have to wait until the next year to re-contribute. Contributions are like birthday cakes. You have one Birthday and one cake. You have to wait the following year before getting a birthday cake again.
Can I write off losses on my TFSA or can I deduct anything on my taxes?
No, you cannot. That would be rich! A Tax Free Savings Account is a safe place to grow your capital free from taxes. Interest, dividends and capital gains that you earned while in the TFSA are tax-free for life!
What’s my TFSA limit?
This is how you can find out your TFSA limit:
- Manual calculation: Using the table below, calculate the room you have available. For example, if you were born in 1994, you would have $54,500 available TFSA room.
- Did you take out money from your TFSA?
- If yes, add that number back to your contribution amount.
- If no, your contribution room is $54,500.
- Add that number back to your contribution amount.
|Year||Contribution Limit||Year to Receive TFSA||Contribution Limit|
Login to CRA from your desktop or through the mobile application:
Desktop – CRA My Account
Mobile – MyCRAApp
- Login to CRA by selecting Option 1 or Option 2
- If you don’t have the passwords, you can sign in through one of your bank cards.
- Click on the Tab that reads “TFSA”
- Click “Contribution Room”
- Look for your TFSA contribution room for 2020 TFSA. If you made contributions during 2020, these will not be reflected in this number. You will need to add them in.
Whatever you do, do not overcontribute and do not put yourself in a position where you might overcontribute. The TFSA is a gift.
- Maintain one TFSA account with one institution. The government knows how many TFSAs you have opened.
- Track your withdrawals and contributions in a spreadsheet.
- Withdraw excess contributions and refer to the CRA for further guidance.
If you don’t use it, you lose it. Do you want to learn how to take full advantage of the TFSA? Join our Finliti Newsletter – click here.