Can Canadian residents invest tax free?

Highlights: Canadian residents can now invest tax-free!

• Newcomers who enter Canada can open a tax-free savings account known as TFSA.
• A TFSA is an investment account wherein individuals can invest without paying investment taxes.
• Canadian residents over 18 with a valid SIN can register for a TFSA.
• The TFSA contribution limit for the year 2024 is set at $7,000

 

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Residents of Canada can make tax-free investments

Canada offers a tax-free savings account (TFSA) that allows Canadian residents to invest without paying any investment taxes. TFSA contributions are made in dollars, with tax exceptions implemented for earnings from investments, existing income in the account, and upcoming withdrawals. Candidates who opt for the TFSA can benefit by having their overall lifetime income taxes on investments reduced.

 

Example: Suleiman contributed $7,000 to his TFSA account in 2024. From 2024 to 2065, he contributed $7,000 annually, which gives him a compounded annual interest rate of 6%. The overall investment returns he would gain would be $868,333.78.

 

If his income tax rate is, on average, 30%, Suleiman would save $260,500.13 in income tax.

 

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Who is eligible to contribute?

Canadian residents over 18 with a valid SIN (Social Insurance Number) can open a TFSA account. Candidates who fulfill the above criteria can qualify irrespective of their legal status (Canada work permit, Canada study permit, Canada citizenship, Canada PR, Canada temporary residence), provided they are considered Canadian residents for income tax purposes. Every year, a Canadian resident assembles a TFSA contribution room. The initial contribution limit in 2009 was $5,000, with an annual contribution limit for 2024 set at $7,000. Candidates are allowed to withdraw funds from their TFSA account without being taxed. The withdrawn amount will be credited to the contribution room for the succeeding year.

 

How do you track your contribution room?

Individuals who exceed the contribution limit face a fine or penalty. The Canada Revenue Agency (CRA) imposes a minimum of 1% monthly tax on the exceeding contributions until they are withdrawn. TFSA holders are advised to monitor their contribution limit to avoid penance.  

 

Example: If Rehman becomes 18 years old in 2024 with a contribution of $9,000 to his TFSA, he will exceed the contribution room by $2,000. If he realizes after 4 months and withdraws the excess $2,000, he must pay the CRA a total of $80.

 

List of investments that can be held in a TFSA

The TFSA facilitates both short-term and medium-term savings; however, it is recommended that long-term investments be maintained in your TFSA.  Some of the investments that can be included in your TFSA are as follows:

 

• ETFs (exchange-traded funds)
• GICs (Guaranteed investment certificates)
• Mutual funds
• Stocks or bonds

 

Candidates who own a high-yielding investment in their TFSA are more likely to gain large, profitable benefits.

 

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What if the TFSA holder becomes a non-resident of the country? 

Individuals who become non-residents are still allowed to maintain their TFSA without being taxed on their withdrawals or investment income in Canada. However, no contribution room will be present for the years they are non-residents. If a non-resident member makes a withdrawal, it will be credited to the contribution room of the succeeding year; however, it can only be used upon the renewal of their PR status.

 

Note: It is advised that non-residents do not make any withdrawals to avoid being taxed.

 

Other things to know about TFSA

Some of the other important things to know as a TFSA holder are as follows:

 

• One can open a TFSA account upon meeting eligibility. Qualifying clientele can register to open an account at any of the financial institutions in Canada.
• TFSA holders who pass away can have their account handed over to a common-aw partner or spouse as a beneficiary account holder.
• The beneficiary account holder will also have similar benefits, including not being taxed on withdrawals or earnings from the account.  

 

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