The Importance of the Tax-Free Savings Account (TFSA)

February 12, 2025

The Tax-Free Savings Account (TFSA) is a strategic investment account that can be used and re-used to save for a wide variety of financial goals from short-term such as purchasing a car, to a long-term objective of building wealth into retirement. The key features of earning tax-free growth, tax-free withdrawals and the flexibility to choose among a variety of investments make it a fundamental component of a savings plan and overall financial strategy.

Key Features of the TFSA

• Since 2009, available to any resident of Canada, 18 years of age or older, with a social insurance number.
• Contributions are not tax deductible towards taxable income.
• Any growth earned while invested within the TFSA is tax sheltered and is not reportable on your income tax.
• Withdrawals are not considered taxable income.
• Unused TFSA contribution room can be carried forward indefinitely into future years.
• If the holder becomes a non-resident they will be allowed to keep their TFSA and will not be taxed on any earnings in the account or withdrawals, however no TFSA contribution room will accumulate for any year they are a non-resident of Canada and contributions made during non-residency may result in tax consequences.
• The federal government sets the annual contribution limit.
• Overcontributions will be charged a 1% penalty tax on the highest excess TFSA amount in the month until it is removed.

Withdrawals and Credit for Re-Contribution

For other tax-sheltered plans in Canada, once contributions are made the amount contributed is subtracted from the allowable limit and cannot be reinstated. This is not the case for a TFSA. If any withdrawals are made from a TFSA, the amount will be added back to the contribution limit in a dollar for dollar re-contribution credit in the following calendar year. This allows the holder to build tax-free savings within the TFSA, remove the funds to use for a current need, to pay down debt or redirect to a different investment account such as the First Home Savings Account (FHSA), Registered Retirement Savings Plan (RRSP) or Registered Educational Savings Plan (RESP) as required. Annual TFSA contribution room is the total of:

• The prescribed annual TFSA contribution limit ($7,000 for 2025).
• Any unused TFSA contribution room from previous years.
• Any withdrawals made from the TFSA in the previous year.

Your TFSA contribution room can be found by checking your CRA My Account or by using Form RC343, Worksheet-TFSA contribution room.

Achieve a Variety of Savings Goals

The features of the TFSA can help grow investments, minimize taxes and maximize returns. Some ways to use these features include:

Tax-Free Rebalancing

Rebalancing assets within your investment accounts means selling off some assets within your portfolio and buying others. It is important to regularly review your investments to assess if they are still aligned with your objectives and risk tolerance or if adjustments are needed to meet your financial goals. One of the unique advantages to the TFSA is the ability to sell investments and reinvest without triggering capital gains tax.

Tax-Free Growth and Compounding

One of the biggest advantages of the TFSA is that all income generated from qualified investments within the account is tax-free. This includes interest, dividends and capital gains. All returns are retained by the account holder which means the more investments grow the greater the benefit of the compounding of growth. This will be particularly important if the goal is for long term growth and wealth accumulation. By utilizing the TFSA early, the tax-free compounding becomes even more effective.

Reducing the Impact of Inflation

A TFSA can be a helpful tool to preserve purchasing power and control the erosion of inflation on the growth earned. Many investments such as mutual funds, stocks or real estate investment trust (REIT) historically have long term growth potential that outpaces inflation. This is invaluable when saving for long term goals such as retirement as taxes will not erode the growth earned. The purchasing power of the money saved will be maintained.

Tax-Free Withdrawals Creates Savings Flexibility

Withdrawals from the TFSA are tax-free and are not reportable on your income tax, making this an ideal option to save for multiple purposes or in tandem with other investment accounts. Saving for lifetime goals like pursuing post-secondary education, buying a vehicle or saving for the down payment on a home can all be done through the TFSA as a stand-alone investment account or together with the government savings account designated for that goal. For example, when saving for the down payment of a home the First Home Savings Account (FHSA) is the intended government program to assist with this goal. The annual contribution limit is $8,000 with a lifetime contribution limit of $40,000. If you have the capability to save more than the limit allowed with the FHSA, a TFSA may be an effective investment account to use in addition to the FHSA.

Supplementing Retirement Savings

The Registered Retirement Savings Plan (RRSP) is a powerful tool for accumulating retirement savings. RRSP contributions are tax deductible meaning they are subtracted from the contributor’s taxable income and reduce tax liability, however money accumulated within the RRSP is tax-deferred. Withdrawals made from the RRSP will be added to the account holder’s taxable income in the calendar year removed. TFSA contributions use after tax dollars meaning the contributions are not tax deductible but in turn are also not reportable upon withdrawing. Using the TFSA in conjunction with the RRSP can help build a diversified retirement portfolio and give you more flexibility and control over your retirement income. Since a TFSA does not impact your taxable income, they will not affect income-tested government programs, such as Old Age Security (OAS) or Guaranteed Income Supplement (GIS). This makes the TFSA valuable for individuals wishing to preserve government benefits while having access to savings.

The TFSA is an important financial savings account available in Canada and may help achieve a wide variety of savings goals. With an investment account that began by allowing Canadians over the age of 18 to contribute $5,000 in 2009, contribution room has grown over the years resulting in a significant value with a life-time contribution maximum of $102,000 in 2025 (not including growth earned). A TFSA may impact your financial success in many ways. Seek out a trusted and qualified financial advisor to learn more about the TFSA and how this unique strategy may be an important part of your overall financial platform.

FirstOntario Credit Union in partnership with Credential Securities and Credential Asset Management Inc. has an experienced team of advisors specializing in various areas of wealth management including retirement planning, investment management, estate and succession planning, individual financial risk management and more. These professionals are here to help you plan for the future and reach your financial goals. Visit FirstOntario.com/Investments or call 1-800-616-8878 ext. 1700 to connect with a FirstOntario advisor and start growing your wealth today – your way.

Mutual funds, other securities and securities related financial planning services are offered through Credential Securities, a division of Credential Qtrade Securities Inc. Credential Securities is a registered mark owned by Aviso Wealth Inc. Mutual funds and related financial planning services are offered through Credential Asset Management Inc. Unless otherwise stated, mutual fund securities and cash balances are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer that insures deposits in credit unions.