Tax-Free Savings Account (TFSA) Update for 2023 

Key Items:

• The 2023 TFSA contribution room is $6,500 per person.
• The cumulative contribution room since 2009 is $88,000.
• You must be 18 years old to open a TFSA.
• You do not receive a tax deduction for contributions to a TFSA; however, any income earned is tax-free, and you do not pay tax on the redemption of money from a TFSA.
• A TFSA can generally hold similar investments as an RRSP/RRIF.
• Estate Planning:
  • You can name your spouse/CLP a successor holder. Upon your death, the TFSA will be left to them as a TFSA without requiring probate.
  • If you don’t have a spouse/CLP, you can name anyone as beneficiary, and upon your death, the value will pass tax-free to them without requiring probate. 

 

Resource: Tax-Free Savings Account Guide for Individuals

TFSA Summary

A Tax-Free Savings Account (TFSA) is a type of savings account that has been available to Canadian residents over the age of 18 since 2009.

Contributions to a TFSA are not tax deductible, but any income earned within the account is tax-free. 

You can withdraw money from a TFSA at any time, and you do not have to pay taxes on the withdrawals.

TFSA Contribution Limits

The annual contribution limit for a TFSA is set by the Government of Canada. 

As of January 1, 2023, the maximum cumulative investment into a TFSA has been $88,000 since 2009. 

If you were 18 or older in 2012 (born in 1994 or prior), you can contribute the maximum to your TFSA since inception.

The limit per year is as follows:

• 2023: $6,500
• 2022: $6,000
• 2021: $6,000
• 2020: $6,000
• 2019: $6,000
• 2018: $5,500
• 2017: $5,500
• 2016: $5,500
• 2015: $10,000
• 2014: $5,500
• 2013: $5,500
• 2009 to 2012: $5,000 each year.

Carry Forward 

If you do not contribute the maximum amount each year, the unused portion of your contribution room will carry over to future years, and you are able to make a lump sum contribution.

Redemptions & Contributions

When you make a withdrawal from a TFSA, the amount of the withdrawal is added to your available contribution room at the beginning of the following year. 

Investments Options

The investments allowed in a TFSA are similar to your RRSP and/or RRIF and can include the following: 

1. Cash
2. Mutual Funds
3. Exchange-Traded Funds (ETFs) 
4. Guaranteed Investment Certificates (GICs)

Many people think that TFSAs can only be invested in savings types of investments, which is incorrect. 

Penalties

If you contribute more money to your Tax-Free Savings Account (TFSA) than your available contribution room, you will be subject to a penalty tax. 

The penalty tax is 1% of the highest excess TFSA amount monthly for each month you are over.

As a result, it can make sense to have your TFSA with one institution as It makes it easier to track.

Estate Planning and TFSAs

When estate planning, you have two options to transfer your TFSA on a tax-free basis. You can name a  Successor Holder or Beneficiary.

 Successor Holder: 

This can be your :

• spouse
• common-law partner (CLP)

For your spouse or CLP, you can name them as successor plan holder, and it will pass directly to them as a TFSA.

Beneficiary:

You can name any individual as the beneficiary of your Tax-Free Savings Account (TFSA). This could be:

• child 
• grandchild, or any other person 
• You can also name a trust as the beneficiary of your TFSA.

If you name someone as a beneficiary, the TFSA will be collapsed, and the proceeds will be paid out tax-free to them.

TFSAs can Avoid Probate.

As an added benefit, the proceeds of a TFSA avoid probate fees and can pass tax-free to the beneficiary or successor holder.  

Summary:

There are several benefits to a Tax-Free Savings Account (TFSA):

1. Tax-free growth: Any income earned within a TFSA is free.
2. Tax-free withdrawals: You can withdraw money from a TFSA at any time, and you do not have to pay taxes on the withdrawals.
3. Flexibility: You can contribute to a TFSA at any time and in any amount if you have contribution room available. You can also withdraw money from a TFSA at any time, and you can use the money for any purpose.
4. Contribution room carries over: If you do not use your full contribution room each year, the unused portion will carry over to future years.
5. Can hold a variety of investments: TFSAs can hold a wide range of investments, including cash, GICs, mutual funds and ETFs.
6. No income limit: There is no income limit for TFSAs so that they can be a good option for people of all income levels.
7. Great estate transfer vehicle. You can name a beneficiary/successor holder of a TFSA, and the assets pass tax-free to that person and avoid probate.

 

Be sure to review how TFSAs can fit into your retirement income plan with your Financial Advisor.

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For more information, you can refer to Preserving Wealth: The Next Generation – The definitive guide to protecting, investing, and transferring wealth by Jack Lumsden, MBA, CFP®.

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