Tax Free Savings Accounts – TFSA

06/05/2024   |   Dentistry, Dentistry, Financial Planning

Exploring investment and savings options in Canada

Tax Free Savings Accounts (TFSA)

Navigating financial planning for all Canadians can be daunting. It can potentially be a bigger challenge for newcomers or those returning after studying abroad. As we explore various savings options in Canada, we explain the Tax-Free Savings Account (TFSA), its eligibility criteria, and why it is one of the most important accounts to use for both short-term and long-term financial goals.

Am I eligible for a TFSA?

CitizenPermanent ResidentNon-residentStudent Visa

TFSA (Tax Free Savings Account)

Yes – anyone 18 years of age of older and has a valid SIN can open a TFSA.Yes – anyone 18 years of age or older and has a valid SIN can open a TFSAYes* – anyone 18 years of age or older and has a valid SIN can open a TFSA however any contributions made while a non-resident will be subject to a 1% tax for each month.Yes* – anyone 18 years of age or older and has a valid SIN can open a TFSA. As a temporary or permanent resident, you are not subject to the non-resident 1% tax per month.

Tax-Free Savings Accounts (TFSAs) are pivotal for both short-term and long-term savings in Canada. Contributions to a TFSA are not tax-deductible, but investment growth and withdrawals are entirely tax-free, making them highly advantageous for saving for various financial goals without the burden of taxes on growth or withdrawals.

Please note you should not contribute to a TFSA as a non-resident as you will be subject to a 1% tax for each month your non-resident contributions remain in the plan.

Key considerations for Incorporated Dentists:

  • Comparing Corporate vs. Personal Investments: Retaining corporate profits in a corporation can allow for a higher initial investment due to tax deferral advantages. But corporate investment income is taxable at 50.2% in Ontario, while investment income in a TFSA is not taxable. As a result, paying personal taxes and investing in a TFSA may be more advantageous in the long-term, depending on your situation.
  • Utilizing your Capital Dividend Account (CDA) to fund your TFSA: If you have a corporate investment account and have realized capital gains, you probably have a capital dividend account (CDA) balance. The non-taxable portion of realized capital gains is added to your CDA. The CDA balance can be distributed to shareholders as a tax-free capital dividend, which can then be deposited into a TFSA to earn tax-free gains.

Common Questions:

  1. What investment options are allowed? Despite being called a “Savings Account”, TFSAs can actually hold a wide range of investments including stocks, bonds, investment funds, GICs, and more.
  2. What is the annual Contribution Limit? In 2024, the annual TFSA contribution limit is $7,000, with unused contribution room carried forward from previous years.
  3. How do I check my Contribution Limit? Your online CRA account or the most recent notice of assessment from CRA is the best place to verify your TFSA contribution limit. Please note this will not include any contributions or withdrawals made during the current year. If you withdraw from your TFSA, you lose that room for the remainder of that calendar year.

Common Pitfalls to Avoid:

  1. Over Contribution: Contributing more than your available TFSA contribution room can result in a penalty tax of 1% per month on the excess amount.
  2. Early Withdrawals and Re-contributions: While withdrawals are tax-free, re-contributions in the same year without sufficient contribution room can lead to over-contribution penalties. If you do not have sufficient contribution room to re-contribute, it is best to re-contribute in the following calendar year when the you re-gain contribution room and new contribution room becomes available to avoid a penalty tax of 1% per month on the excess amount.
  3. Risk-Averse Behaviour: A disciplined approach in a diversified portfolio with higher equity exposure can maximize long-term growth potential. Although short-term volatility can cause some stress, being heavily weighted in fixed income or cash (AKA using your TFSA like a typical low-interest bank savings account) can lead to lower returns and lost purchasing power due to inflation.

Tax-Free Savings Accounts offer a flexible, tax-efficient way to save for a wide range of financial goals. Whether you’re saving for a big purchase, an emergency fund, or retirement, understanding the benefits and rules of TFSAs can help you make the most of this valuable savings tool.

In our next article we will dive into how to use First Home Savings Accounts in your investment portfolio. If you are ready to start planning your financial future reach out to us HERE for more information.