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How to make the most of your TFSA contribution limit


The TFSA or Tax-Free Savings Account was first offered in 2009 as a way for Canadian adults with a valid SIN to set money aside tax-free. With a TFSA, you can make eligible investments and those savings can grow tax-free throughout your lifetime. All interest, dividends, and capital gains earned in your TFSA are tax-free, when earned and when withdrawn.

Here are 9 ways to make the most of your TFSA contribution limit:

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1. Understand your contribution limit

TFSAs have a yearly contribution limit. This means you're only allowed to contribute a certain amount of money into a TFSA every year. And exceeding your limit results in monthly taxation on the excess amount. That's why it's important to have a clear idea of your contribution limit before you begin investing in a TFSA.

Your yearly contribution room will include the amount prescribed by the government and any unused contribution room from previous years. In addition, withdrawals from previous years are added back to your contribution room starting in the year following the withdrawal. For example, the contribution limit in 2020 was $6,000. However, if your unused contribution amount from 2019 was $2,000, this amount is carried forward to 2020, giving you a total contribution limit of $8,000. Your contribution limit for each year is determined by adding three amounts:

  • Prescribed yearly contribution limit—$6,000 for 2021
  • Any amount you may have withdrawn in a previous year (not including direct transfers out of one TFSA to another TFSA)
  • All unused contribution room from previous years

2. Avoid over-contributing to your TFSA

Each contribution to your TFSA counts towards your contribution limit. Withdrawals from your account will not affect your contribution limit until the following year. Let's say, for example, your TFSA contribution limit for 2021 is $8,000. You contribute $6,000 in October, leaving you with a contribution room of $2,000 for the rest of the year. If you withdraw $4,000 in November, your contribution room does not change until 2022. At this point, you may only contribute an additional $2,000. If you deposit the withdrawn amount of $4,000 back into your account in 2021, you will exceed your contribution limit.

You can avoid over-contribution by:

  • Staying informed on the prescribed annual limit for each calendar year, and ensuring your contributions are within the allowed amount.
  • Being cautious when moving your TFSA from one financial institution to another— you may want to choose to make a direct transfer instead of withdrawing from one account and re-contributing into another, which may lead to over-contribution, and a monthly tax of 1% on the excess amount.
  • Filing a tax return annually will allow you to check your contribution room via Canada Revenue Agency's e-services or call center services.
  • Information provided in your MyCRA account may not be immediately updated to include your most recent transactions. To avoid accidental over-contributions, it is wise to track your TFSA contributions and withdrawals yourself.

3. Know TFSA contribution basics

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While the yearly limits for your TFSA may be small, keep in mind that the accumulated amount over multiple years can be significant. To maximize the benefits of your TFSA account, ensure that you're aware of a few basic rules:

  • Your TFSA contribution room accumulates every year starting from the year you turn 18, even if you have not opened a TFSA registered plan. If you are opening a TFSA for the first time today and have been over the age of 18 since 2009, you will be allowed to contribute up to $75,500 in 2021.
  • You can only make contributions to your TFSA while you are a resident of Canada. If your status changes to 'non-resident of Canada,' you will be allowed to retain your TFSA account, and the income within your account will remain tax-free for Canadian income tax purposes. However, you will not be able to make further contributions to your TFSA, and your contribution room will not accumulate for any year throughout which you are non-resident. Please check with your tax advisor regarding possible non-Canadian tax implications.

4. Making withdrawals from your TFSA

The amount you have in your TFSA is always available to you1. You can withdraw a part of or all the funds in your TFSA tax-free. Any amount withdrawn (including the income or growth which exceeds your original contributions) will be added back to your contribution room, but only starting in the following year. If you have already used up your contribution room for the current year, you will have to wait until the first day of the next year to re-contribute the withdrawn amount.

You are allowed to make in-kind withdrawals from your TFSA to a non-registered account. To transfer investments from a TFSA to an RRSP, the securities must be 'de-registered' to a non-registered account first before being contributed to an RRSP. Keep in mind that the current market value of your investment will determine the amount transferred into a different account. When transferring to an RRSP, your contribution amount will be equivalent to the current value of the investment. When transferring to a non-registered investment account, however, the current value of your TFSA investment will become the cost basis of the non-registered investment, which will determine future gain or loss incurred when the investment is eventually sold.

You can take advantage of in-kind withdrawals when you require additional funds in order to maximize your RRSP contribution for the year. You will still have the flexibility to re-contribute your withdrawn amount into your TFSA once your contribution room is refreshed in the following year.

5. Diversify your portfolio

The gains and interest earned in your TFSA account are completely tax-free. That’s why it can be a good idea to build a diverse portfolio that includes a TFSA. You're allowed an unlimited number of TFSAs, as long as your combined contributions remain within your yearly contribution limit. When managing more than one TFSA, take care to regularly check your contribution in each account and verify the sum against your total contribution limit to avoid any accidental over-contribution. Your investment advisor can guide you on ways to diversify your portfolio. Ideally, you may want to choose to invest in multiple securities. This can include mutual funds, GICs and ETFS, among others. You may also choose to manage your own investment portfolio, which will allow you to manage multiple investments within a single TFSA and to track markets to ensure a higher return on investment (ROI).

6. Automate your TFSA contributions

Maximizing your TFSA's potential means ensuring it's always working for you. A key strategy is to contribute early, so your investments have more time to grow. Make sure you're consistently contributing to your TFSA by enabling automated deposits into your account. This will keep your TFSA growing in a tax-free environment. Remember to ensure that you stay within your contribution room.

7. Manage the frequency of trading within your TFSA

Your TFSA is generally meant to be used for investment purposes, and not to carry on a business. Depending on the circumstances, frequent trading activity may be considered a business—even if it is taking place within your TFSA. According to the Income Tax Act, a TFSA that is found to be operating as a business will be subject to income tax on the income earned from that business.

In recent years, the Canada Revenue Agency (CRA) has increased their scrutiny of registered plans such as TFSAs which are engaged in frequent trading and/or speculative transactions.

Several factors are considered when determining whether a TFSA is considered to be carrying on a business. These include transaction frequency, term of investments, intention to buy securities with short-term profit goal, types and number of securities, investment expertise, and hours spent on trading activities.

8. Plan for the long term

Your TFSA account can be a great way to save for the future and may come in handy in several situations. In case of early retirement, for example, you may need to wait a few years before you're eligible to receive a pension. At that time, withdrawing from your RRSP may not be the preferred approach either as withdrawals from RRSPs or RRIFs are taxable. In contrast, the funds in your TFSA account are received tax-free upon withdrawal. This can make a TFSA a flexible investment tool for your retirement alongside your RRSP.

9. Designate a beneficiary

An important part of your TFSA strategy should include designating a beneficiary on it. This ensures that your beneficiary can have immediate access to your TFSA funds in the event of your death. Other potential benefits of designating a beneficiary include avoiding probate fees and situations where assets that become part of the estate end up being inaccessible due to lengthy processes.

Designating a beneficiary is easy—simply include the name of the individual on the TFSA application form or related document. Alternatively, you can add your estate as the beneficiary. Where certain conditions are met, a spouse or common-law partner may be able to transfer the value of the TFSA at the time of death into their own TFSA without impacting their own contribution room.

You also have the option to designate a spouse or common-law partner as a successor holder of the TFSA, in which case the tax-free status of the TFSA is maintained and they effectively become the new holder of the TFSA upon your death.

True flexibility

When comparing TFSAs and RRSPs, flexibility is one of the key differentiators. TFSAs allow you to contribute and withdraw money as you please, without having to pay taxes at any point. In contrast, RRSPs treat withdrawals as income, thus incurring taxation—even when withdrawing during retirement. Since income from your TFSA is tax-free, it can be a sound strategy for maximizing the return on your investments.

TFSAs can work well for multiple savings goals, providing a great way to save for short-term needs as well as long-term goals such as retirement. While RRSPs are generally converted into RRIFs which require minimum annual withdrawals starting at age 72, TFSAs can continue to grow your money for however long you choose. Start evaluating the opportunities you could leverage with a TFSA, keep an eye on your contribution limits, and start investing to make your money work for you—tax-free.


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