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TFSA : Top Questions and Answers

18 October 2021 by National Bank
A small cardboard house, coins and a piggy bank

How does the Tax-Free Savings Account (TFSA) work? What makes it different from an RRSP? Which savings tactic is better for me? There are many questions when it comes to TFSAs and its features remain misunderstood by many Canadians. Here are a few explanations to help you take advantage of this savings account.

What is the maximum contribution allowed to a TFSA?

The maximum contribution amount is $6,000 for 2021 and will remain the same for 2022.

According to The Canada Revenue Agency, the annual cap will increase with inflation.

What will happen if I exceed the annual TFSA contribution limit?

A tax of 1% per month applies to the overcontribution only if it remains in the TFSA in the same calendar year. The change of year marks the entry into a new period of contribution, in other words, the right to continue contributing during the new year.

For example, if you deposited $1,000 in excess in your TFSA in December 2020, you will be required to pay 1% of that amount in taxes ($10 for the month of overcontribution) as a penalty. This $1,000 will be deducted from your contribution room in January 2021. It will no longer be considered excess.

If I did not contribute before this year, what happens to my contribution room from previous years?

Your unused contribution room accumulates from 2009, when the TFSA was created, to today.

From 2009 to 2012, the annual TFSA contribution limit was $5,000. It was raised to $5,500 in 2013 and 2014, before rising to $10,000 in 2015 and being reduced to $5,500 between 2016 and 2018 and to $6,000 in 2019, 2020 and 2021.

If you have never contributed to a TFSA, you have accumulated $75,500 in contribution room from 2009 to 2021. You can contribute up to this amount in one year, if you can afford it and if you are a Canadian resident who had reached the age of majority by 2009 as long as you have a valid social insurance number.

Is depositing cash the only way to contribute to a TFSA?

Although many investors choose to make their TFSA contributions in cash, in-kind contributions from a non-registered account are also an option.

It’s important to remember that when you make an in-kind contribution, the Canada Revenue Agency considers the transaction a deemed disposition of the investment.  In other words, they consider that the investment has been sold, and if the fair market value is higher than the book value, you will need to declare a capital gain.  Unfortunately, in the opposite scenario, you cannot claim the resulting capital loss.  The amount of the contribution to your TFSA will be equal to the fair market value of the investment.

Any future investment income and gains from investment products that you include in your TFSA will grow in a tax-sheltered environment.

What types of investments are permitted in a TFSA?

As a self-directed investor at National Bank Direct Brokerage, all the investment products that you trade in other types of accounts are also eligible in a TFSA. Stocks, exchange-traded-funds (ETFs), options, mutual funds, fixed income securities (bonds) and guaranteed investment certificates (GICs).

What happens if I withdraw money from my TFSA, and how can I contribute again afterwards?

Amounts withdrawn from the TFSA are tax-free.

This is the big difference between a TFSA and an RRSP, whose withdrawals are added to your annual income and are, therefore, subject to income tax.

The total amount withdrawn from a TFSA in a calendar year will be added to the contribution limit for the following year.

For example, if in 2020 you withdrew $3,000 from your TFSA to fund renovations, you can contribute up to $9,000 in 2021, plus unused contribution room from previous years.

Are TFSAs for short-term savings or for retirement?

The TFSA can be used for both. Its main advantage remains the compound return that accumulates over time sheltered from taxes.

Is the TFSA a better retirement savings plan than an RRSP?

According to most financial planners, the RRSP is the best retirement savings plan for the majority of people.

However, if you expect your tax rate to be higher at retirement than it is now it’s better to contribute to a TFSA first. It's generally the case for people who will qualify for the Guaranteed Income Supplement (GIS), students or part-time workers.

Can I open a joint TFSA?

No, only individual accounts are allowed.

You can't open a TFSA in someone else's name nor contribute to someone else's TFA. What you may do however, is donate money to someone who will then contribute to their own TFSA.

The TFSA provides investors with a level of flexibility and simplicity that is hard to beat. Regardless of your life stage, it has a role to play.  If you haven’t already opened a TFSA, now’s the time; nothing pairs better with a Tax-Free Savings Account than commission free investing!

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