How Canadian Residents Can Invest Tax-Free

Newcomers to Canada looking to grow their wealth may want to take advantage of the ability to open a Tax-Free Savings Account (TFSA).

TFSA is a type of investment account that individuals can use to invest without having to pay taxes on their investment income.

Like the  Roth IRA in the United States, TFSA  contributions are made in after-tax dollars (i.e., contributions are not tax-deductible), but any income or income invested in the account, and any future withdrawals, are tax-free.

 Why open TFSA?

People who use  TFSA can significantly reduce the income tax payable on their investments over their lifetime. Let's consider the following example:

• Martha will contribute $7000 to her  TFSA  in 2024.
• From 2024 to 2065, she contributes $7000 every year.
• Martha earns an average compound return of 6% per annum.

In this example, Martha receives an investment return of $868,333.78.

If her final income tax rate is 30%, Martha will save $260,500.13 in income taxes (assuming interest income).

Who can help?

Canadian residents who are 18 years of age or older and have a valid Social Insurance Number (SIN) can open a TFSA.

It doesn't matter what form of legal status a person has in Canada (e.g., temporary residence, work/study permit, permanent residence, or citizenship). For TFSA purposes, what matters is whether the individual is considered a Canadian resident for income tax purposes.

How much can one person help?

Each Canadian resident collects the  TFSA Help Room for every year they are 18 years old and a resident of Canada. For 2024, the contribution limit is $7,000 per year. This contribution limit started at $5,000 in 2009 and rounded up to the nearest $500 with the inflation index.

Someone who was 18 years old in 2009 and has been living in Canada since then raised a maximum contribution room of $95,000.

Individuals can withdraw their funds from TFSA  at any time and their withdrawals are not taxed. The amount they withdraw will be added to their contribution room for the following year  .

Follow-up of the Partnership Room

If someone exceeds their contribution limit, they face a severe fine. The Canada Revenue Agency (CRA) taxes 1% of their surplus contribution every month, until all additional contributions are removed.

For example, if George turns 18 in 2024 and contributes $8,000 to his  TFSA, $1,000 will exceed his contribution room. If George realizes his mistake three months later and withdraws the $1,000 contribution surplus, he will owe the  CRA  $30 in taxes ($1,000  x 1% x 3).

Anyone can search for their  TFSA  contribution limits in CRA My Account, but these figures can be misleading, as they are usually a whole year old. It is the responsibility of the TFSA  holder to maintain their records to ensure that they do not exceed their contribution limit.

What investments can be held at TFSA ?

The word "savings" in TFSA is something wrong. Although many institutions allow clients to hold and deposit cash in a  TFSA, and some people may use it for short- or medium-term savings, TFSA is better suited for holding  long-term investments, such as exchange-traded funds (ETFs)., mutual funds, guaranteed investment certificates (GIC), stocks or bonds.

Individuals will earn more profit from  TFSA when they have higher-yielding investments inside their account.

Most institutions have similar rules for what can be held at  the TFSA, such as the RRSP .

What happens if the holder becomes a non-resident of Canada?

If a person becomes a non-resident of Canada (e.g., by returning to their home country), they can still maintain their  TFSA, and their investment income or withdrawals will not be taxed in Canada.

People don't collect help rooms for any year they are not residents of Canada.

If a non-resident makes a withdrawal, these withdrawals will continue to be added to the Participation Room in the following year, but they can only use the Participation Room if they re-establish Canadian residency.

Individuals should avoid contributing to their  TFSA  when they are not residents of Canada, as any contributions they make as non-residents will be taxable at 1% per month.

How do I know if I am a resident of Canada?

Individuals can consult the income tax slip: S5-F1-C1: Determination of a person's residency status.

They can also call  CRA at 1-800-959-8281 (from anywhere in Canada and the United States) or 613-940-8495

(from outside Canada and the United States).

Where can I open TFSA?

Almost all Canadian financial institutions that offer investment accounts allow eligible clients to open a  TFSA.

What happens if the holder dies?

 TFSA holders can transfer their  TFSA to their spouse or common-law partner as the account surrogate holder.

Like the original holder, the successor holder will not be taxed on any income or withdrawals from the inherited account.