Since its inception in 2009, the Tax-Free Savings Account (TFSA) has increasingly grown in popularity as more and more Canadians embrace it. As per the Canada Revenue Agency, there were 6.1 million TFSA holders as of 2020.
A TFSA is a registered account you can use to save/invest funds while shielding your investment returns (dividends, interest, and capital gains) from taxes for life.
Every year, the government announces the contribution limit ($6,000 for 2022 and $6,500 for 2023), and unused contribution room can be carried forward indefinitely.
If you have been eligible to contribute to a TFSA since 2009, your accumulated contribution room is $81,500 in 2022 and $88,000 in 2023.
The TFSA is versatile and can be designed to meet various specific goals, including retirement savings, a down payment for a house, debt repayment, an emergency fund, etc.
So, what are some of the investment assets you can put in your TFSA?
Best TFSA Investment Options in Canada
There are several options for investing or saving within your TFSA account.
Please note that the five options below are examples only and do not represent financial advice or a call to specifically use any of these options for your TFSA.
1. Cash in a TFSA
This is as simple and conservative as you can get – apart from keeping money under your couch. 😉
You can keep your cash in a savings account and earn interest on it like you would for any other savings account. There are “high-interest” savings accounts specifically designed for TFSAs, such as:
- EQ Bank TFSA: Earn a standard 3.00%* rate on your Tax-Free Savings Account. It also offers TFSA GICs – learn more in this review.
- Tangerine Bank TFSA – 1.00%
- Simplii Financial TFSA – 0.40%
- CIBC TFSA Tax Advantage Savings Account – 0.50%
- TD High-Interest TFSA – 0.85%
The decision to put TFSA funds in a high-interest account may be due to a short investment horizon, low-risk tolerance, etc.
If you want to access your funds at short notice or for unexpected expenses (i.e. emergency funds), cash in a savings account is one option for you – another is using GICs.
Savings account and GIC rates are so low these days, but they are pretty safe if you can’t afford to lose any portion of your capital.
Related: Best TFSA Savings Accounts in Canada
2. Guaranteed Income Certificates (GIC) in a TFSA
Also referred to as Term Deposits, Guaranteed Investment Certificates (GICs) are another option for those who want their TFSA investment in low-risk to risk-free investments.
A GIC will pay you a fixed interest rate on the principal invested, and your principal investment is 100% protected. There are so many types of GICs – generally, GICs of varying terms will attract different interest rates.
Term lengths can range from a few months to several years, and your funds are locked in for that time.
For example, EQ Bank’s Tax-Free Guaranteed Investment Certificates have the following interest rates (as of September 2, 2023):
- 3 months: 3.25%
- 6 months: 5.00%
- 9 months: 4.75%
- 1 year: 5.60%
- 2 years: 5.55%
- 3 years: 5.35%
- 4 years: 5.10%
- 5 years: 5.10%
Tangerine Bank has these rates for TFSA GICs:
- 1-year GIC: 5.95%
- 2-year GIC: 4.20%
- 3-year GIC: 4.00%
- 4-year GIC: 3.90%
- 5-year GIC: 3.85%
You can purchase GICs through your bank, credit union, and other financial institutions.
Related: The Top GIC Rates in Canada
3. ETFs and Index Funds in a TFSA
Exchange-traded funds (ETFs) are unlike traditional mutual/index funds in that they are traded like a stock on an Exchange, and their prices change throughout the day. Their fees are also generally lower than for index/mutual funds.
ETFs are a great investment option for a self-directed TFSA account. Watch out for the fees/commissions you may incur when buying or selling ETFs through your brokerage account.
Questrade offers up to $50 in free stocks or ETF trades when you sign up and fund your account with at least $1,000. ETF purchases are free on the platform, and you pay low competitive fees for stocks and ETF sales. Here’s a detailed overview of the platform.
ETF’s market share keeps growing in Canada, and assets under management are expected to reach $400 billion by 2023.
One downside to using ETFs/index funds is that you may need to rebalance your portfolio at least once a year – some investors may find this cumbersome. That said, you could also buy all-in-one ETFs that take care of this automatically.
An alternative to investing in ETFs using a self-directed brokerage account is to use the services of a robo-advisor.
Robo-advisors allow you to invest in low-cost ETFs without having to worry about re-balancing your portfolio or anything at all, and they charge a much lower fee than your mutual fund manager.
I have reviewed all the major robo-advisors in Canada, and my top pick is Wealthsimple Invest. When you sign-up with the company using this promo link, you receive a $25 cash bonus.
Index funds are similar to mutual funds in that they are a basket of stocks, bonds, commodities, etc. However, unlike mutual funds, index funds are designed to represent an index or a broad section of the “market,” hoping to generate the returns experienced in that “section” of the market.
For example, an index fund that tracks the S&P 500 will hold stocks that represent the composition of the S&P 500, and investors who hold that index fund are theoretically hoping to replicate the S&P’s annual return (i.e. market return).
Index funds generally have lower fees than traditional mutual funds because fund management is more passive than active, leading to lower operational/admin costs. A sample portfolio’s asset allocation using TD e-Series Funds could look like this:
- TD Cdn Index-e: 26%
- TD U.S. Index-e: 28%
- TD Cdn Bond Index-e: 20%
- TD Int’l Index-e: 26%
4. Individual Stocks and Bonds in a TFSA
You can buy and hold individual stocks and bonds (government and corporate) in your TFSA account. This approach comes with its own challenges, as you should always consider diversification with your investing strategy to lower risk.
Buying individual stocks and bonds can work out great as part of a wider portfolio asset allocation.
If you buy U.S. dividend-paying stocks in your TFSA, you will be subject to a 15% withholding tax. This is, however, not the case with Canadian dividend stocks.
Easily purchase stocks on Wealthsimple Trade and stocks and bonds on Questrade.
5. Mutual Funds in a TFSA
Mutual funds generally refer to collections of investment assets, such as stocks, bonds, etc., that are actively managed by a professional manager or investment company.
Mutual funds are an easy way to build a diversified portfolio without having a great deal of investment knowledge. Mutual funds come with fees, including MER and other admin fees.
Want to minimize your investment fees? Check out this article on Investment Fees in Canada.
There are thousands of mutual fund options, and you can easily approach your bank to open a mutual funds TFSA account. These funds are generally structured to cater to different investing styles and risk tolerances.
What Is the TFSA Contribution Limit?
The TFSA contribution limit for 2023 is $6,500.
However, the amount you can contribute depends on your contribution room. For example, if you did not contribute to it last year, you can contribute more this year.
Here is the contribution limit for each of the last 10 years:
How Does a TFSA Work?
TFSAs can be provided by banks, credit unions, and insurance companies, and the amount you contribute and earn from investments is usually tax-free.
After opening a TFSA, you can contribute money or investments up to your limit each year without paying taxes. Investments can include guaranteed investment certificates (GICs), stocks, bonds, and mutual funds.
You can withdraw whenever you want; again, you do not pay tax. As such, you can use TFSAs for short-term savings or longer-term goals.
How to Open a TFSA
Opening a TFSA is usually a straightforward process. The easiest option is via your bank or credit union.
You can open a TFSA if you are a Canadian resident with a valid SIN and the age of majority in your province or territory. Non-residents can also open them, but the taxation rules are slightly different.
You must provide your bank with your SIN and personal details, like your date of birth. It may ask for other documents, and then it can open the TFSA for you.
Pros and Cons of a TFSA
- Save money and invest tax-free over your lifetime.
- TFSAs are easy to open via your bank or credit union.
- You can open more than one TFSA.
- You can withdraw funds at any time, making them a flexible option.
- Make use of unused contribution room from previous years.
- You can transfer a TFSA to beneficiaries when you pass away.
- If you withdraw from your TFSA, the contribution room returns the following year, so you can also use it for short-term saving goals.
- Withdrawals don’t count as income, so they do not impact your benefits.
- TFSAs cannot be used to reduce your taxable income.
- Because withdrawals are so easy, this could prevent people from thinking long-term about their savings.
- TFSAs are not protected from creditors, so your holdings can be seized.
- Overcontributions are taxed at 1% per month.
Why Invest in a TFSA?
If you want to enjoy tax-free savings, a TFSA can be a good option. As you can see above, there are many benefits, and it is a flexible way to save tax-free that is easy to open.
You can open as many as you want, save up to the maximum amount, and withdraw when you want to.
It is particularly useful for short-term savings goals as well as longer-term goals. However, RRSPs can be better if you aim to save for retirement.
Can You Have Multiple TFSAs?
You can open more than one TFSA if you want to. However, it’s important to remember that you only have a set amount you can contribute at any time.
This is spread over your TFSAs, and you must stay within your available contribution room.
How to Withdraw and Transfer Funds from a TFSA
One of the benefits of TFSAs is that withdrawing your funds is a simple process. It will depend on your investment type, but you can generally withdraw it anytime.
If you withdraw funds from your TFSA, the amount will only be added back to your contribution room at the start of the next year.
TFSA assets can also be transferred between banks without triggering taxes.
What Happens to a TFSA After Death?
As a general rule, the amount in the TFSA will simply be passed on to your beneficiaries when you die.
Tax implications may vary, however, depending on the situation. This includes the type of TFSA, whether income has been earned after your death, and the amount of time that passes between your death and when the amounts are distributed.
What Are Non-Qualified Investments in TFSAs?
Non-qualified investments are taxable for income earned and capital gains and must be reported.
Securities can be qualified investments or non-qualified. In general, a security is a qualified investment if it trades on a stock exchange that is a Designated Stock Exchange.
If you buy an investment that trades on over-the-counter (OTC) markets, these are usually non-qualified investments. However, if it also trades on a designated exchange, it might be qualified.
You should avoid non-qualified investments in your TFSA to avoid penalties.
Can I Day Trade in a TFSA?
It is not against the rules to day trade in your TFSA. However, there are a few things to be aware of.
It mainly depends on how often you are trading, how long you hold onto your investments, and how much you are making in profits.
For example, if you frequently buy and sell securities within the same day and spend a lot of time transacting in your account, the CRA may deem you to be carrying on a business. In this case, income earned in your account and capital gains become taxable.
That said, the earnings from investments that most people would make by investing in their TFSA are usually tax-free.
In summary, if you earn income from non-qualified or prohibited investments or if the income is earned from a business, you would pay tax on your returns.
TFSA Statistics in Canada
The latest official statistics relate to the 2020 tax year and were released in 2022. Here are some of the most relevant statistics that may be of interest:
- There are 16,094,430 TFSA holders in total and 24,284,400 TFSAs.
- The average number of TFSAs held by each holder is 1.5. In total, 10,747,170 people hold one TFSA, while 14,100 hold 10 or more.
- 1,426,220 TFSA holders maximized their contributions.
- Ontario is the province or territory with the largest number of TFSA holders (6,566,100), while Nunavut has the smallest number (7,000).
- The total value of contributions for the year was $85,620,810,000.
TFSA vs RRSP
If you’re considering a TFSA, there’s a good chance you are at least familiar with RRSPs.
Both are similar in that they provide a way to save tax-free and help you reach your savings goals. Both also allow your unused contribution room to be carried forward.
However, they have some important differences:
- As explained, withdrawing from a TFSA is tax-free. But when you withdraw from an RRSP, you pay income taxes.
- The RRSP has a higher contribution limit of up to $30,780 or 18% of your earned income in 2023, whichever is the lower of the two.
- When you withdraw from an RRSP, you lose the contribution room. With TFSAs, it can be added back the following year.
- Contributions to the RRSP are tax-deductible, so you could reduce tax on your income.
- TFSAs do not have an age limit, but an RRSP matures at the end of the year you turn 71.
- RRSPs are protected from creditors, while TFSAs are not. This means your TFSA holdings could be seized.
Generally, RRSPs are primarily used for retirement savings, and TFSAs are used for a wider range of savings goals. However, you can also use your TFSA for your retirement savings.
If saving for retirement is your main goal, focus on your RRSP and then use a TFSA as an additional option.
It’s usually a good idea to have both an RRSP and TFSA for different savings purposes.
TFSAs are very flexible, and this is one reason why they are very popular. You can make withdrawals from your account and are allowed to re-contribute any withdrawal amounts in the following year.
Don’t forget that there’s a blacklist of investments (non-qualified or prohibited) that you should avoid in your TFSA.
As with any other investment strategy, you should decide how to invest your TFSA after carefully examining your financial goals, investment time horizon, risk tolerance, investment knowledge, fees, and portfolio size.