Taxing times: Taking advantage of new TFSA limits

Happy New Year! Did you know that the Canadian government gave you a gift on January 1, 2024? The only catch is that it’s up to you to pick it up. They increased your Tax Free Savings Account (TFSA) limit by another $7,000 this year, bringing the total TFSA contribution limit up to $95,000. Take advantage of it! 

The TFSA is one of the most tax-advantageous tools we have in Canada, but many people find the name to be misleading. One of the most common misconceptions we run into is the belief that a TFSA must be exclusively for savings. Unfortunately, in most instances, a savings account is the worst possible place for a TFSA to be. 

Rules review

Residents of Canada who are 18 or older are able to open and contribute to a TFSA. You do not get an immediate tax break when contributing to a TFSA, but your money gets to grow tax-free and you can withdraw the funds tax-free whenever you want them. That’s the real power of TFSAs. You never pay tax on the growth of your funds. Not even when they are withdrawn. 

Unfortunately, there is a contribution limit. Fortunately, that limit is cumulative, so if you didn’t take advantage of it last year, it carries forward. For example, for someone who was 18 or older in 2009 and has never contributed to their TFSA, their limit this year would be $95,000. Currently that limit grows by an additional $7,000 per year. Withdrawals can be made tax-free at any time and those funds may be re-contributed, but if you’ve already maxed out your contribution room, you can’t re-contribute until the following year.

TFSAs can be (and usually should be) investment accounts. The rules that govern what the money in a TFSA account can be invested in are identical to the rules for Registered Retirement Savings Plans (RRSPs). So yes – you can have a TFSA that is truly just a savings account. You could have the funds in GICs or term deposits. But they can also be mutual funds or even individual stocks. 

Be aware that there can be massive penalties for over-contributing, so be very careful to obey the limit rules to ensure that doesn’t happen to you. It can be very easy to over-contribute in cases where regular withdrawals and re-contributions occur or if the account holder is unaware that the account type is a TFSA.

How to use a TFSA

First off, because of their tax-free status, the best possible use of a TFSA for most people is to earn the highest return possible. Not to gamble with it, but to hold their most growth-oriented investments in it. The reason is three-fold:

1. It’s always better to make more money than less money, but that’s even more true when it’s tax-free.

2. In most cases a TFSA will have the longest time horizon, better suiting it to a more volatile financial strategy. 

3. Often people continue to add to their TFSA into retirement, providing opportunities of dollar-cost averaging, which is also better suited for more volatile investments.

Now, that’s not to say that a TFSA should always be invested. I’m just saying that more often than not it should be. Ask yourself what your TFSA money will be used for. If it’s for retirement, passing on to the next generation, or you’re setting it aside “just in case” but will probably never use it, then your money is likely going to be there for a long time. I don’t recommend using short-term solutions like GICs, savings accounts, or term deposits for long-term intentions. In circumstances where the money is likely to sit there for a long time, prudent investments are the best choice. 

One final caveat

Don’t accidentally over-contribute! As noted earlier, in some cases this is easy to do, so we don’t recommend using your TFSA as a regular savings account if you expect to make frequent withdrawals. 

The penalty for over-contributing is one precent of the value of the excess contribution per month. In the past, the CRA has been quick to forgive accidental over-contributions, but they are less inclined to do so now. When you look up your limit in your MyCRA account, be aware that the limit they show isn’t usually accurate until sometime after the end of February. And even then, it only counts contributions made up to the end of the calendar year, so you will need to factor in any contributions made since January 1.

Talk to your financial advisor to figure out if you should make more use of your TFSA room. These days every tax break helps.

P.S. Thank you to everyone who asked the government to reconsider their position on the inclusion of charitable giving benefits in the AMT calculation. It worked! At least for now. The proposed changes (originally scheduled to take effect on January 1, 2024) have been delayed, suggesting that they are being reconsidered. Thank you readers for stepping up and getting involved. Thank you Chrystia Freeland for listening.

Arnold Machel lives, works, and worships in the White Rock/South Surrey area. He holds the Certified Financial Planner® designation, is the Founder of Visionvest Financial Planning & Services, and sits on the board of Abundance Canada. Visionvest (his firm) has been voted Best Investment/Financial Advisor by Peace Arch News readers for the past three years in a row.

Questions and comments can be directed to him at dr.rrsp@visionvest.ca. Please note that all comments are of a general nature and should not be relied upon as individual advice. While every attempt is made to ensure accuracy, facts and figures are not guaranteed.