TFSAs

Tax Free Savings Account (TFSA) was first introduced in 2009, and has gained popularity over the years as a tool for savings or investing in general. Contribution room for the TFSA is indexed to inflation and since its inception has been updated just twice. A short-lived increase to $10,000 in 2015 by the Conservative government was reversed in 2016 by the new Liberal government.

The Tax-Free Savings Account is not just a savings account. And one of the greatest mistakes people make right now is to not realize that their money can do more than just sit there. What it should really be called is a Tax-Free INVESTMENT Account. A TFSA allows you to buy equities like stocks, mutual funds, GICs, bonds and of course ETFs so your money can grow tax-free.

If you’re asking, what’s the catch, well, there isn’t one unless you count the yearly limit for the amount of money you can deposit into the TFSA (although that limit grows each year). And the great thing about TFSAs that’s particularly helpful for people with shorter-term savings goals is that you can withdraw the money at any time without getting dinged or taxed or levied in any way. Pretty sweet.

This one-word mix-up is one that plagues many Canadians, but it is especially confusing for folks just starting out, who until this point have probably only had a standard savings account. A “savings account” to many people means a virtual box to stash your cash, where it’ll gain the tiniest bit of interest and that’ll charge you fees to withdraw money. Basically, it’s the less convenient alternative to a chequing account.

The “S” in TFSA has become a bit of a misnomer. That’s why many people treat them as a glorified savings account, keeping most of their funds in things like cash and Guaranteed Investment Certificates.

Low risk? Sure. But the returns are pitiful. However, it’s only when you combine higher returns with tax-free growth that you really unlock the wealth-building power of TFSAs. That’s why if you have a long-term investment horizon, you should consider holding investment funds, stocks, bonds, and REITs in this account.

One of the attractions of the Tax Free Savings Account is that investment income or returns earned are tax free.

Below is a chart of comparison between RRSPs and TFSAs.

Comparison of RRSPs and TFSAs

	RRSP	TFSA
Is there an annual contribution limit?	Yes it is based on previous year's earned income	Yes, an annual limit but there are no earning requirements
Can I carry forward unused contribution room?	Yes	Yes
Is there a monthly penalty on excess contributions?	Yes, calculated at month-end	Yes, calculated on the highest excess during the month
Are my contributions tax-deductible?	Yes	No
Is my investment growth tax-deferred or tax-free?		Tax-free
Are taxes payable on withdrawals?	Withdrawals are fully taxable	Withdrawals are tax-free - except for growth after death if no successor holder
Are withdrawals added to my contribution room?	No	Yes, but not until the following year
Can withdrawals have an impact on income-tested benefits/credits?	Yes	No
What is the minimum age to contribute?	None	Age 18
What is the maximum age to contribute?	At the end of the 71st year or 71st year of spouse in case of spousal plan	None
If I borrow to invest in this account, can I deduct the interest?	No	No
Can I use assets in this account as collateral for a loan?	No	Yes