Contents
A tax-free savings account (TFSA) is one of the most flexible registered accounts your clients can use in Canada. It works like an investment account while keeping growth sheltered from tax. Learning how a TFSA is structured, who can use it, and where clients often run into trouble can make your planning conversations much more effective.
In this article, Wealth Professional Canada will talk about what a TFSA is, how it works, and five common mistakes your clients must avoid. We've also included fresh TFSA news stories below for quick reference and easy sharing!
A TFSA is a registered savings account that functions like an investment account. It can hold both cash and a range of qualified investments that generate income. That income can come from interest, dividends, or capital gains, and it is generally not taxed, even when your clients withdraw it.
The federal government oversees the TFSA rules, but banks, credit unions, insurance companies, and other financial institutions administer the accounts. In practice, that means your clients open a TFSA with an issuer, and the issuer registers the arrangement with the Government of Canada as a tax-free savings account.
A helpful point to stress with your clients is how a TFSA compares with an RRSP. Money going into a TFSA does not generate a tax deduction. That is different from an RRSP contribution, which usually reduces taxable income in the contribution year.
With a TFSA, the advantage is on the growth side. Once the contribution is made, income earned inside the account is generally tax-free. Withdrawals are also tax-free if there are no excess amounts or other issues.
Watch this video to learn more about TFSAs:
Check out the benefits of using TFSAs for retirement income in this article.
If your clients are confident managing their own portfolios, they might open a self-directed TFSA. In that case, the issuer sets up a trust, and your client can buy and sell qualified investments such as:
If a TFSA holder invests with the frequency and experience of a professional trader, the account might be treated differently. In some situations, the TFSA could be de-registered, and income treated as business income, which would remove the tax-free benefit.
The contribution rules are central to how a TFSA functions. Your client's TFSA contribution room is the maximum cumulative amount that person is allowed to contribute across all their TFSAs. That room is specific to each individual and can change in three ways:
If your client holds more than one TFSA, their total contribution room applies across all accounts combined. It is not a limit for each account separately.
Clients can also contribute to a TFSA at any time during the calendar year as long as they are residents of Canada and have available room. Every dollar they contribute reduces their available TFSA room by the same amount.
This reduction happens immediately from a tax perspective, even if it takes the Canada Revenue Agency (CRA) system some time to reflect it online.
Any individual who wants to save and invest money tax-free can open a TFSA if they meet these requirements:
In some provinces and territories, your client must be at least 19 years old to sign a contract such as a TFSA agreement. If the person turns 18 but cannot open the account until 19 due to contract rules, their TFSA contribution room can still start accumulating from the year they turn 18. They can then use that room once the account is opened.
New residents of Canada can open a TFSA from the day they become residents, provided they are 18 or older. In this case, their contribution room starts to build in the year they become residents, not in earlier years based only on age.
Non-residents of Canada are treated differently. A non-resident can hold a TFSA if they are 18 or older and have a SIN. However, they cannot add to it tax-free while they are non-residents. Contributions made while someone is a non-resident are subject to tax.
The interaction between TFSAs and government benefits is a major advantage for many. For example, TFSA income and withdrawals have no effect on:
They also do not affect eligibility for the:
For clients who rely on, or expect to rely on, income-tested benefits, this feature makes the TFSA uniquely attractive compared with non-registered accounts.
The main downside of a TFSA is not about tax on regular investment growth. It is about the risk of misusing the account and triggering unexpected taxes and penalties.
A TFSA is designed to shelter investment income. However, there are several situations where a TFSA becomes taxable. Here are three examples:
When your client contributes more than their available TFSA contribution room, they create an excess amount. This excess is taxable at a rate of one percent per month on the highest excess amount in the account for each month it remains. The tax continues until the excess is removed.
A TFSA is designed for Canadian residents. This is why contributions made while someone is a non-resident are not treated the same way as contributions made by residents. Non-resident contributions are taxable.
For clients who leave Canada or return after some time abroad, this can be confusing. They might think they can keep topping up their TFSA the same way they did before.
Another downside comes from holding non-permitted investments in a TFSA. This includes prohibited or non-qualified investments, or situations where the account receives an advantage that the rules do not allow. These situations trigger tax and can also affect the registration of the TFSA itself.
Here are five common mistakes to watch for:
The most frequent mistake is simply not checking available TFSA room before contributing. Clients might contribute to multiple TFSAs, assume the limit applies per account, or rely on an outdated CRA balance.
Any contribution that pushes the total above available room creates an excess amount. That excess is subject to the one percent per month tax until it is removed. Even if the error is unintentional, the tax still applies.
Best practice is to encourage your clients to keep their own TFSA ledger. Each time they contribute, they should record the amount and date, across all TFSAs. Before a new contribution, they can compare their records to the latest CRA information to make sure there is still room.
Another mistake is re-contributing a withdrawal in the same calendar year without enough unused contribution room. Many people assume that if they take money out, they can put that same amount back in whenever they want. In a TFSA, this is only safe if there is still unused room available that year.
The amount withdrawn will be added back to available room, but that happens on January 1 of the next calendar year. Until then, the withdrawal does not reopen space. If your clients replace the withdrawal in the same year and have no unused room, the replacement becomes an excess.
This mistake arises when a client continues contributing while they are a non-resident of Canada. As soon as someone is a non-resident for income tax purposes, new TFSA contributions are taxable.
This rule applies even if the account was opened while they were a resident and even if the contribution room exists on paper. Non-residents can still withdraw funds from their TFSAs, and those withdrawals remain tax-free.
However, they should not re-contribute any amount while they are non-residents. Doing so creates a non-resident contribution, which is subject to its own tax.
Another common error is attempting to transfer TFSA funds by withdrawing from one account and contributing to another. This is not a direct transfer, even if the money moves on the same day or the amounts match.
When your client withdraws funds from a TFSA, that withdrawal is treated as a normal withdrawal. It reduces the TFSA's balance and will be added to contribution room on January 1 of the next year.
When they contribute that same money to another TFSA in the same year, it counts as a new contribution. If they do not have enough room, they create an excess amount and a one percent per month tax.
Lastly, some clients fail to address TFSA tax issues when they arise. Once there is an excess amount, a non-resident contribution, or non-permitted investments in the account, your client has a tax obligation.
If tax applies, the person must file a TFSA Return, using Form RC243, by June 30 of the year after the tax year. The return calculates the tax owing on excess amounts, non-resident contributions, or non-permitted investments.
Aside from these five, here are other TFSA mistakes that your clients should avoid:
If clients can avoid these mistakes, they'll reap the benefit of compounding. This can help their earnings generate even more earnings.
For financial advisors, the TFSA is a flexible structure that can support saving and investing across many stages of life. It can hold different types of investments plus keep growth and withdrawals free from tax in most situations.
When used properly, a tax-free savings account can support more stable planning for your clients. It allows them to save and invest in a way that supports their cash flow needs while keeping federal benefits and credits intact. With your guidance, your clients can avoid the common mistakes and keep the long-term advantages of their TFSAs.
Trump accounts bring US$1,000 federal seeds and a US$6.25 billion pledge
The confidence gap quietly costs cautious Canadians thousands in retirement wealth
Canada faces pressure to shield Canadian ETF issuers as US managers roll out tax‑savvy clones
As personal wealth climbs, so does the pressure on Canadians to make smarter and riskier money moves
Infrastructure spending and public service job cuts dominate the story, key insights for advisors can be found in the details
WP looks at some of the key measures announced in the budget
OSC cracks down on illicit profits from confidential Score Media acquisition information
Investors risk hefty fines as outdated data and strict rules catch thousands off guard in 2024
Higher rates, mortgage readjustments, and rising cost of living are pressuring even high income earners, but one company is offering a novel way to monetize equity
CIRO fines and bans advisor after short-term investment needs clash with long-term fund selection
