WORKERS CAPITAL
By Dale Jackson
BNNBLOOMBERG
November 28, 2024
With just a few weeks left in 2024 and new year around the corner, Nicole Ewing, Director, Tax and Estate Planning at TD Wealth, highlights some of the key tax
The Canada Revenue Agency (CRA) has added another $7,000 to the total amount that can be contributed to a tax-free savings account (TFSA) as of Jan. 1, 2025.
The amount matches last year’s increase, which was increased by $500 to compensate for higher inflation.
Contrary to popular belief, increases in allowable contributions are at the discretion of the government of the day, but Ottawa has never missed a hike since the TFSA was introduced in 2009.
That means those who have already contributed the maximum allowable amount can kick in up to $7,000 more in their accounts to invest in just about anything - with zero tax implications.
TFSAs have become wildly popular with Canadians for short-term savings such as education, vacations and even day trading. But with the total room for someone who has never contributed now at $102,000, it is also an effective retirement savings tool to compliment a registered retirement savings plan (RRSP).
How does a TFSA work?
Funds can be withdrawn from a TFSA at any time and investment returns - be they capital gains on equities, or income from dividends and fixed income - are never taxed.
In comparison, half of capital gains on equities in non-registered accounts are taxed and income is fully taxed. Dividends are also subject to full taxation, with the exception of a tax credit on eligible payouts.
It is important to note, however, that non-Canadian dividends are subject to a withholding tax on behalf of the U.S. Internal Revenue Service (IRS). That includes the big U.S. blue-chip companies. It also includes U.S. mutual funds or exchange traded funds (ETFs), and even Canadian mutual funds and ETFs that hold U.S. equities.
From a tax perspective the closest thing to a TFSA available to the average Canadian is the principal residence tax exemption, which allows Canadians to avoid paying any tax on the capital gains they generate from the sale of their principal residences.
As another comparison, RRSP contributions - along with the returns they generate over the years - are fully taxed according to the individual’s marginal rate when the funds are withdrawn. TFSA contributions, however, can not be deducted from your current taxable income like RRSP contributions.
Like the RRSP, a TFSA can hold just about any type of investments, including stocks, bonds, mutual funds, exchange traded funds, real estate investment trusts and even some options.
Using your RRSP and TFSA strategically
The TFSA has grown into a powerful retirement investment tool that can be used strategically with an RRSP.
Since RRSP withdrawals are fully taxed, investors can divert contributions to a TFSA well before retirement to avoid higher marginal tax rates and even Old Age Security (OAS) clawbacks, by strategically shifting contributions to their TFSAs well before retirement.
Banking up a significant amount of cash in a TFSA allows retirees to top up needed cash without tax consequences, while keeping RRSP withdrawals in the lowest tax bracket.
How much can you contribute to a TFSA?
With the $7,000 available contribution space coming in January, the total allowable space for those 18 years or older when the TFSA was introduced in 2009 will be $102,000.
Available contribution space often varies for individuals based on the amount of contributions and withdrawals made over the years.
You can find yours through four online services provided by the CRA:
With just a few weeks left in 2024 and new year around the corner, Nicole Ewing, Director, Tax and Estate Planning at TD Wealth, highlights some of the key tax
The Canada Revenue Agency (CRA) has added another $7,000 to the total amount that can be contributed to a tax-free savings account (TFSA) as of Jan. 1, 2025.
The amount matches last year’s increase, which was increased by $500 to compensate for higher inflation.
Contrary to popular belief, increases in allowable contributions are at the discretion of the government of the day, but Ottawa has never missed a hike since the TFSA was introduced in 2009.
That means those who have already contributed the maximum allowable amount can kick in up to $7,000 more in their accounts to invest in just about anything - with zero tax implications.
TFSAs have become wildly popular with Canadians for short-term savings such as education, vacations and even day trading. But with the total room for someone who has never contributed now at $102,000, it is also an effective retirement savings tool to compliment a registered retirement savings plan (RRSP).
How does a TFSA work?
Funds can be withdrawn from a TFSA at any time and investment returns - be they capital gains on equities, or income from dividends and fixed income - are never taxed.
In comparison, half of capital gains on equities in non-registered accounts are taxed and income is fully taxed. Dividends are also subject to full taxation, with the exception of a tax credit on eligible payouts.
It is important to note, however, that non-Canadian dividends are subject to a withholding tax on behalf of the U.S. Internal Revenue Service (IRS). That includes the big U.S. blue-chip companies. It also includes U.S. mutual funds or exchange traded funds (ETFs), and even Canadian mutual funds and ETFs that hold U.S. equities.
From a tax perspective the closest thing to a TFSA available to the average Canadian is the principal residence tax exemption, which allows Canadians to avoid paying any tax on the capital gains they generate from the sale of their principal residences.
As another comparison, RRSP contributions - along with the returns they generate over the years - are fully taxed according to the individual’s marginal rate when the funds are withdrawn. TFSA contributions, however, can not be deducted from your current taxable income like RRSP contributions.
Like the RRSP, a TFSA can hold just about any type of investments, including stocks, bonds, mutual funds, exchange traded funds, real estate investment trusts and even some options.
Using your RRSP and TFSA strategically
The TFSA has grown into a powerful retirement investment tool that can be used strategically with an RRSP.
Since RRSP withdrawals are fully taxed, investors can divert contributions to a TFSA well before retirement to avoid higher marginal tax rates and even Old Age Security (OAS) clawbacks, by strategically shifting contributions to their TFSAs well before retirement.
Banking up a significant amount of cash in a TFSA allows retirees to top up needed cash without tax consequences, while keeping RRSP withdrawals in the lowest tax bracket.
How much can you contribute to a TFSA?
With the $7,000 available contribution space coming in January, the total allowable space for those 18 years or older when the TFSA was introduced in 2009 will be $102,000.
Available contribution space often varies for individuals based on the amount of contributions and withdrawals made over the years.
You can find yours through four online services provided by the CRA:
My Account
MyCRA
Represent a Client (if you have an authorized representative)
Tax Information Phone Service (TIPS) at 1-800-267-6999
Many Canadians contribute to their TFSAs through more than one institution and it is the account holder’s responsibility to ensure they don’t exceed their limits. Over-contributions are subject to penalties, so it’s important to keep an up-to-date tally.
One important note: Contribution space from TFSA withdrawals can not be reclaimed until the following calendar year.
That means if your TFSA is maxed out and you make a withdrawal in the waning days of 2024, you need to wait until 2025 to get it back - along with the $7,000 for everyone else.
MyCRA
Represent a Client (if you have an authorized representative)
Tax Information Phone Service (TIPS) at 1-800-267-6999
Many Canadians contribute to their TFSAs through more than one institution and it is the account holder’s responsibility to ensure they don’t exceed their limits. Over-contributions are subject to penalties, so it’s important to keep an up-to-date tally.
One important note: Contribution space from TFSA withdrawals can not be reclaimed until the following calendar year.
That means if your TFSA is maxed out and you make a withdrawal in the waning days of 2024, you need to wait until 2025 to get it back - along with the $7,000 for everyone else.
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