Dale Jackson

Personal Finance Columnist, Payback Time

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You might want to tighten up your holiday spending to help finance your New Year’s resolution; the one about getting serious about saving for retirement.

Ottawa has put another $6,000 in tax-free savings account (TFSA) contribution space under the tree this year. That means starting Jan. 1, those who have already contributed the maximum allowable amount to their TFSAs can kick in up to $6,000 more to invest in just about anything, with zero tax implications. 

Annual TFSA limit amounts are at the discretion of the government of the day; but what government would want to tamper with an investment vehicle that has become wildly popular with average investors? Over 15 million Canadians have at least one TFSA to save for retirement, education, vacations, or even speculative day trading. Since its inception, the total value of TFSA holdings in Canada has topped $350 billion.

HOW A TFSA WORKS

Funds can be withdrawn from a TFSA at any time and investment returns - be they capital gains on equities, or income from dividends and fixed income - are never taxed.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.

As another comparison, registered retirement savings plan (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returns they generate over the years - are fully taxed according to the individual’s marginal rate when the funds are withdrawn.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.     

Similar to the RRSP, a TFSA can hold just about any type of investments including stocks, bonds, mutual funds, exchange-traded funds (ETFs), real estate investment trusts and even options. 

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 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.

HOW MUCH CAN YOU CONTRIBUTE

With the $6,000 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 $81,500. 

Available contribution space often varies for individuals based on 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

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 is the account holder’s responsibility to ensure they don’t exceed their limits. Over-contributions are subject to penalties from the Canada Revenue Agency, so it’s important to keep an up-to-date tally.    

One other note: contribution space from TFSA withdrawals can not be reclaimed until the following calendar year. That means if you maxed out your TFSA and made a withdrawal in 2021, you need to wait until 2022 to get it back - along with the $6,000 for everyone else.