Kevin Greenard: Canada’s Tax-Free Savings Account turns 14

The Tax Free Savings Account (TFSA) has been around for 14 years now and many Canadians have used the tax free benefits of this investment account.

In a TFSA, you have the option of investing in securities similar to those in your registered retirement savings plan (RRSP) or non-registered investment accounts such as individual stocks and exchange traded funds (ETFs) . Canadians can grow their investments and savings much faster because the income and growth of a TFSA is completely tax-free.

The federal Department of Finance publishes annually indexed adjustments for personal income tax and benefit amounts. The index rate is in fact the consumer price index published by Statistics Canada. Most personal income tax and benefit amounts are indexed to inflation each year.

The TFSA is slightly different in that annual adjustments are only made to the nearest $ 500 increment. As a result, several years may elapse without changing the annual limit.

For calculation purposes, the annual TFSA limit was initially set at $ 5,000 and indexed to inflation for each year after 2009. The only exception to this rule was the large one-time increase in 2015.

Here are the annual and cumulative limits:

Year	Annual limit	Cumulative limit
2009	$ 5,000	$ 5,000
2010	$ 5,000	$ 10,000
2011	$ 5,000	$ 15,000
2012	$ 5,000	$ 20,000
2013	$ 5,500	$ 25,500
2014	$ 5,500	$ 31,000
2015	$ 10,000	$ 41,000
2016	$ 5,500	$ 46,500
2017	$ 5,500	$ 52,000
2018	$ 5,500	$ 57,500
2019	$ 6,000	$ 63,500
2020	$ 6,000	$ 69,500
2021	$ 6,000	$ 75,500
2022	$ 6,000	$ 81,500

If you’ve never contributed to a TFSA, the cumulative limit is an important number. If you were 18 or older in 2009, you can contribute $ 81,500 to a TFSA if you’ve never contributed before.

Contributions

Once you’ve determined how much you can contribute to your TFSA, the next decision is how to contribute. Below are a few options you might consider when deciding how to contribute to your TFSA.

Check or electronic transfer

One of the easiest ways to contribute to your TFSA is to use the excess funds accumulated in your chequing or savings account. You can use these funds and write a check or transfer the funds electronically to your TFSA account.

Unregistered account

For clients who have a non-registered investment account, cash or securities can be transferred from the non-registered account to your TFSA. Care should be taken before making in-kind transfers to make sure you understand the tax consequences. If a security has a large unrealized gain, the proportional portion of the gain would be realized when the shares are transferred to the TFSA. On the other hand, if you have an unrealized loss, the loss would be disallowed under the superficial loss rules if it were transferred from a non-registered account to a TFSA.

To give

TFSAs can be an effective way to split income among family members, such as your spouse or adult children. You can give a gift to help them contribute to their TFSA. The attribution of income tax does not apply to TFSA income because it is tax free.

Registered Retirement Income Fund (RRIF)

If you’ve already reached the age at which you are withdrawing funds from a RRIF, it may be a good idea to make the withdrawal early in the year rather than wait until the end of the year. Prior to the TFSA, if clients did not need the chosen RRIF withdrawal amount, it was generally advisable to postpone the RRIF payment until later in the year. Growing in a TFSA is better than growing in a RRIF. Any growth in a RRIF is fully taxed when the funds are withdrawn. Any growth in a TFSA is not taxable. If your RRIF payment is over $ 6,000, consider making a partial payment at the start of the year to fund the TFSA.

Our approach of contributing early in the year and investing 100% in stocks has allowed TFSAs to grow substantially – all tax-sheltered! As TFSA accounts have grown, so has the need for diversification within the account. Historically, we have invested in individual Canadian stocks in TFSAs. When the TFSA was smaller, we avoided foreign stocks. The rationale behind this is that dividend income from a foreign country paid into a TFSA could be subject to foreign withholding tax. If clients are looking to add a US stock, in order to avoid withholding tax on dividend income, they should choose a stock that is more growth oriented and pays little or no dividend income. Growth in the US stock is not taxed and can be another investment option to help maximize tax-free growth.

When deciding what to invest in, we encourage you to know all of your investment options. Your choice of investment options should reflect your investment objectives, risk tolerance and time horizon. Once these have been determined, it is advisable to contribute early.

Kevin Greenard CPA CA FMA CFP CIM is Portfolio Manager and Vice President, Wealth Management in the Greenard Group at Scotia Wealth Management in Victoria. His column appears weekly on timescolonist.com. Call 250-389-2138, email [email protected] or visit greenardgroup.com/secondopinion.