Columnist image
Dale Jackson

Personal Finance Columnist, Payback Time

|Archive

As a small consolation to the sky-high cost of living, the federal government is boosting the 2023 tax-free savings account (TFSA) contribution limit by an additional $500.

That means the total amount anyone over 18 years old can contribute to their TFSA will be expanded to $6,500, starting Jan. 1. In previous years the contribution limit was $6,000. The $500 increase is the result of a formula to index annual limits to inflation in $500 increments. 

It’s important to note that the limit only applies to TFSA holders who have contributed the maximum amount in previous years. In other words, unused contribution space accumulates over time and can be carried forward to future years. According to the latest estimate from the Canada Revenue Agency (CRA), only 10 per cent of TFSA holders contribute their total limits. For the vast majority, annual limits are not an issue.

 

TFSA: THE ULTIMATE TAX-FREE INVESTMENT ACCOUNT 

Since its introduction in the wake of the 2008 global financial meltdown, the TFSA has become the ultimate tax-free investment vehicle for everyone. Gains on investments other than U.S. dividends are not taxed in a TFSA.

Funds can be withdrawn at any time and investment returns - be they capital gains from equities sold, or income from Canadian dividends and fixed income - are “tax free”.

In non-registered accounts, by comparison, half of capital gains are taxed and most income is fully taxed at the individual’s marginal rate.

Dividends are also subject to full taxation but tax credits can be applied against payouts from eligible companies.

As another comparison, registered retirement savings plan (RRSP) contributions - along with the returns they generate over time - are fully taxed when withdrawn at the individual’s marginal rate.

RRSP contributions, however, can be deducted from taxable income - unlike TFSA contributions.

The TFSA is great for short-term savings goals like education or vacations, but has also become a very effective retirement tax savings tool as the allowable contribution amount grows. With proper planning, tax-free TFSA funds can be used to top up RRSP withdraws in retirement when taxable income climbs to a higher marginal rate.  

 

THE BEST INVESTMENTS FOR A TFSA

Like an RRSP, a TFSA can hold just about any type of investment including stocks traded on major exchanges, bonds, mutual funds, exchange-traded funds (ETFs) and real estate investment trusts (REITs).

Portfolios can be tailored for any time horizon, risk level or return goal. Do-it-yourself speculative investors can shield their winnings from taxation, but losses can not be applied against capital gains.

For the risk averse, rising yields on fixed income such as guaranteed investment certificates (GICs) are fully sheltered.

A qualified investment advisor can help determine what is best for you. 

 

HOW MUCH CAN YOU CONTRIBUTE?  

With $6,500 in new 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 $88,000.

Available contribution space varies for individuals based on contributions and withdrawals made over the years. You can find yours through online services provided by the CRA such as “My Account”. 

A word of warning: contribution limits posted by the CRA are usually for the previous year, so be sure to include contributions made in the current year. Many Canadians contribute to their TFSAs through more than one institution and it’s the account holder who will be penalized if they exceed their limit.

One more thing: contribution space from TFSA withdrawals can not be reclaimed until the following calendar year. If you maxed out your TFSA and made a withdrawal in 2022, as an example, you need to wait until 2023 to get it back - along with the $6,500 expansion for everyone else.