In 2009, the government of the day created the Tax Free Savings Account (TFSA) as a means to efficiently invest more. Surprisingly, eight years in to the TFSA’s existence, some Canadians are still confused about how they actually work. And, no it’s not another way for the rich to save on taxes, it can benefit the ordinary Canadian too. We’re going to talk about 10 things you should know about the TFSA.

You Can Have More Than One TFSA Account

You can have multiple TFSA accounts at different institutions, however, they all share the same contribution limit. As of 2017, that limit is $5,500 per year. Good records are a must when you have multiple accounts, as you need to track your contributions and withdrawals as it’s much easier to over contribute by accident.

Over Contributions Incur Penalties

Whenever you go over your contribution limit, you will incur a penalty of 1% per month on that excess amount. This over contributing is a simple mistake because many people don’t under understand how the contribution limit works. This gets more complicated when you have multiple TFSAs, and you have several transactions happening throughout the year. Your best method of determining your contribution limit is to keep track of it yourself, or chat with Canada Revenue Agency (CRA). They can let you know what your limit is for the year.

Successor Holder vs. Beneficiary

You can name a beneficiary to your TFSA, however, you may not realize you can name someone a ‘success holder’. Your beneficiary can be anyone you choose, such as a child, parent, or sibling; a successor holder can only be your spouse or common-law partner. Your beneficiary receives the proceeds of your TFSA upon your death, and the TFSA is closed. With a successor holder, your account is rolled into their TFSA which doesn’t affect their contribution room. If you have a spouse or common-law partner and want them to inherit your TFSA, it makes sense to name them successor holder as they can continue to grow your investments tax free; and, avoid taxes payable on any income on the account from your time of death to when the account is closed.

Contributions in Kind

Are you thinking about transferring from your non-registered account to your TFSA? You need to ensure there are no unrealized capital gains or losses. Once you transfer in-kind to a TFSA, it’s considered a deemed disposition for tax purposes; however, there’s a catch, unrealized gains are realized immediately upon disposition, but unrealized losses are not claimed. You should never ever transfer an investment in a loss position to your TFSA. What you should do is sell the security in your non-registered account so you can claim the loss, transfer the cash into your TFSA, then wait at least thirty days before repurchasing so you avert prompting a superficial loss.

Non-qualified Investments

While most investments can be help in your TFSA, there are some that are considered non-qualified. The non-qualified investments are:

• Any personal debt in your name;

• Any debt or share of a corporation in that you hold a significant interest;

• Any debt or share of a corporation that you don’t deal with at arm’s length.

Any time you have a non-qualified investment in your TFSA, there is a one-time tax equal to 50% of the fair market value at the time it’s acquired or became non-qualified.

Foreign Withholding Tax

If you have foreign investments and receive dividends, they’ll be subject to a non-resident withholding tax. Usually on your foreign investments in non-registered accounts you can claim the foreign dividend tax credit against that foreign tax withheld; however, that is not the case with TFSAs.

Non-resident contributions

If you are considered a non-resident and you make a contribution to your TFSA, you are taxed at a rate of 1% per month on said contributions. This generally applies to someone who is a dual citizen of Canada and the United States. Unlike RRSPs, there is no tax treaty between Canada and the United States that recognizes the TFSA as an exempt foreign trust. As far as the Internal Revenue Service is concerned, you need to disclose and pay tax on income generated by your TFSA. If you are a US citizen, you’re better off keeping your investments in an RRSP or non-registered accounts rather than a TFSA.

Social Security Benefits

Your TFSA withdrawals are not considered taxable income. As such, and a major advantage, is that withdrawals won’t count against you for the purpose of determining your social security benefits, such as Old Age Security (OAS) or Guaranteed Income Supplement (GIS), which get clawed back based on your income level for the tax year.

Loan Interest Tax-deductibility

Any time you borrow money to invest in a non-registered investment account, the interest is tax deductible. However, this doesn’t apply with your TFSA or any other registered accounts. Of course, this makes total sense, as with TFSAs there are no tax ramifications for contributions or withdrawals, so you shouldn’t be able to claim a deduction for the interest paid. You can’t have your cake and eat it too.

Retroactive Contribution Room

The beauty of the TFSA is that you have accumulated contribution room that depends on how long you’ve been a Canadian resident, and not when you first opened your TFSA. If you open your TFSA today, you still have contribution room retroactive back to when TFSAs were first introduced in 2009, as long as you were 18 or older at the time. If you weren’t 18 in 2009, then you have no accumulated contribution room for those years. If you turned 18 in 2013, then you would have no accumulated contribution room for 2009 to 2012.

The TFSA is an excellent investment vehicle for all Canadians. As the contribution limit continues to accumulate, and, hopefully, the government increases the yearly amount, in the future, you’ll need to ensure you know everything about your TFSA.