TFSAs Explained For Newcomers To Canada

TFSAs: Key Takeaways 

• A Tax-Free Savings Account is a tax-advantaged savings vehicle, but opening one won’t automatically increase your wealth. You need to invest inside the TFSA. 
• Any growth in wealth within your TFSA is excluded from your income. This can supercharge your wealth building. 
• You generally won’t pay tax on any interest, dividends, or capital gains earned within a TFSA, and you can withdraw funds from your TFSA without paying taxes on the amount withdrawn. This can be a game changer during retirement. 
• We hosted a webinar with our partner Scotiabank discussing how to build wealth as a newcomer. Watch it for detailed information about tax-advantaged accounts in Canada, including TFSAs.

What Is A TFSA? 

A Tax-Free Savings Account is a tax-advantaged vehicle the Canadian government offers to residents who have a valid social insurance number (SIN). It helps Canadian residents and citizens grow their savings and investments, tax-free because any interest or other income earned in the account is generally not taxable when it is withdrawn. 

Opening a TFSA will not automatically mean that you grow your wealth. You need to hold investment accounts in the TFSA that generate income. So, for example, you can open a trading account within a TFSA and trade funds or stocks within the account to generate income. But if you just open the TFSA and don’t ‘do’ anything with the money in there, it’s not likely to grow. You need to invest within the TFSA to grow your wealth. 

Types Of Investment You Can Hold In Your TFSA

You can hold the following assets in a TFSA: 

• Cash
• High interest savings accounts
• Guaranteed investment certificates (GICs)
• Bonds
• Stocks
• Index or mutual funds.

TFSA Contribution Limits

There are annual contribution limits for TFSA accounts. These contribution limits are the maximum amount you can invest into a TFSA each year without incurring penalties. 

The contribution limits are cumulative. This means that if you don’t reach your contribution limit in one year, you have more contribution room in the next year. 

For example, if you became a permanent (and tax) resident in Canada in 2023 and received contribution room of $6,500 but you only contributed $5,000 in 2023, then you may be able to contribute up to $8,500 in 2024. This amount is the sum of your leftover contribution room for 2023 plus the total contribution room in 2024. You won’t have contribution room for 2009-2022 unless you met the eligibility criteria. 

How To Determine Your Contribution Room

If you want information about your TFSA contribution room, use the following services: 

• CRA’s My Account for Individuals
• Your MyCRA mobile app
• Call the CRA at 1-800-959-8281.

TFSA vs RRSP vs FHSA: What Are The Differences?

A TFSA is different from the Registered Retirement Savings Plan (RRSP) and First Home Savers Account (FHSA). The TFSA, RRSP, and FHSA are all tax-advantaged accounts that the Canadian government has created to help Canadian tax residents to build wealth or achieve financial goals. But each vehicle has a different purpose and functions differently. Here are some of the main features of each: 

Purpose: A TFSA is a flexible savings account for any purpose including retirement, education, or major purchases. RRSP and FHSA accounts are much less flexible, since an RRSP is primarily for retirement savings (with some exceptions) and the FHSA is specifically for the purpose of buying a first home. 

Tax Treatment: A TFSA is different from the Registered Retirement Savings Plan (RRSP) and First Home Savers Account (FHSA) because contributions are not deductible for tax purposes. In other words, if you contribute funds to your RRSP or FHSA, the contribution will decrease your taxable income for that year. This is not true for TFSAs, which are not tax deductible. 

The reason for this is that TFSAs are a post-tax savings vehicle. The government considers that you have already paid tax on the amount, so any gains within the account are tax-free. 

Contribution Limit: Each account is similar in that there is a contribution limit. It’s best to check up-to-date information from the Canadian government about these limits, since they may change annually. 

Withdrawal Penalty: TFSAs do not incur penalties for withdrawing contributions. FHSAs and RRSPs may have a penalty if funds are withdrawn for purposes other than those allowed (ie. first home purchase or retirement). 

Benefits of TFSAs

Here’s a quick summary of some of the benefits of a TFSA: 

• Tax-free growth: any interest, dividends, or capital gains earned within a TFSA are not subject to tax. 
• Tax-free withdrawals: you can withdraw funds from your TFSA without paying income tax on the amount withdrawn. 
• No withdrawal penalties. 
• Re-contribution room: if you withdraw money from you TFSA, you regain that contribution room in the following tax year. For example, if you have maxed out your contribution room but you remove $10,000 in 2023, you will be able to contribute $17,000 in 2024 ($7000 for 2024 plus the $10,000 withdrawn). 
• No forced withdrawals: Unlike RRSPs, you won’t be forced to withdraw or convert the balance of your TFSA at a certain age. 
• TFSAs can be passed to your beneficiaries after your death tax free (though income earned after the account holder’s death may be subject to tax). 
• Withdrawals from your TFSA do not impact your income-tested government benefits, such as your Old Age Security, Canada Child Benefit, Canada Workers Benefit, or GST/HST Credit. 

The tax-free withdrawal benefit is likely more significant than it seems at first glance when it comes to retirement planning. When you retire, you may be eligible for the Canada Pension Plan and Old Age Security. However, if you earn above the threshold amount (currently $91,000 annually) your OAS may be reduced. Money withdrawn from your RRSP is considered income for tax purposes, while money withdrawn from your TFSA is not. So, TFSA withdrawals can help to keep your reportable income below the OAS income thresholds, freeing up more cash in your retirement.  

How Are TFSAs Different For Newcomers To Canada? 

TFSAs work exactly the same way for newcomers to Canada as they do for those born in Canada. The only difference is that your contribution room as a newcomer only starts when you have a SIN and are a tax resident in Canada. For those born in Canada or who immigrated as a child, contribution room typically starts accumulating from 18 years old. 

Should You Pay Into Your TFSA or RRSP? 

This is a complex question and the answer will vary depending on your exact circumstances. But here are a few rules of thumb:

• If you have the funds to max out your TFSA, RRSP, and FHSA, it’s usually a good idea to contribute to each.  
• If you are in a lower tax bracket, such as if you’re new to Canada and early in your career, it is often more advantageous long-term to contribute to your TFSA instead of your RRSP.
• If you expect your future tax rate to be similar, TFSA contributions may be advantageous. 
• If your employer offers a matching RRSP contribution program, it is usually a good idea to take advantage of the ‘free money’. 
• It might be advantageous to use your RRSP to save for your first home or Lifelong Learning Plan. 
• If you want to maximize government benefits when you retire, your TFSA withdrawals are tax-free and not considered income.

Remember: You should seek independent advice from a wealth advisor for tailored guidance based on your unique circumstances. 

What Happens To Your TFSA If You Leave Canada? 

Non-residents of Canada are not able to contribute to the TFSA without incurring penalties. The penalty amount is 1% per month on the contribution.

Here’s what that looks like: 

Someone became a permanent resident of Canada and opened a TFSA in 2017, became a citizen in 2020, then went to do a two-year working holiday in Australia in May 2021, before coming back to live in Canada in May 2023.

This person:

• Would not be able to contribute to their TFSA for the years they were living in Australia (2022). 
• They would be able to contribute for the years they were partially resident (2021 and 2023). They would also have contribution room for 2017-2021.

If you’re uncertain about your contribution room, you should contact the CRA. The penalty for overcontributing is steep, so it’s worth taking the time to clarify. 

For more information about TFSAs, check out the Guide for Individuals from the CRA.