If you’re a newcomer to Canada and want to start saving and investing right away Tax-Free Savings Account (TFSA) is a great choice to consider. It took me a few years to learn about the TFSA. If you are new to Canada, I hope this article will help you to get a good understanding of a TFSA account. I also have some suggestions for you to open a brokerage account where you can get free stocks, money or/and free trades by simply opening and funding your account with Wealthsimple, InteractiveBrokers, and Questrade.
Anyone living in Canada who is 18 years of age or older, has a valid SIN and is a resident is qualified to open a TFSA. Anyone who is 18 years of age or older and a non-resident of Canada with a valid SIN is also qualified to open a TFSA.
TFSA is essentially a tax-free savings account, as the name implies. This implies that you virtually always don’t have to pay taxes on your contributions, profits, or interest that has accumulated. You can put your money into investment portfolios inside of a TFSA, and you can withdraw any earnings from the account without paying taxes on them.
So, even though the name may make a typical savings account sound similar, a TFSA is actually quite different. It can also be thought of as a tax-free investment account, which is arguably a more advantageous way to look at it. Your TFSA allows you to invest money in a wide range of tax-free investment vehicles, including equities, bonds, exchange-traded funds (ETFs), guaranteed investment certificates (CIGs), and mutual funds. When the time comes for you to withdraw funds, there won’t be any tax due on the earnings in that account either.
No tax
TFSAs work best as investment vehicles. Over the long term, investments typically offer the best returns and can yield substantially greater returns than regular savings accounts. So, over a longer period of time, an investment account will be most helpful to you. Because you had paid tax on your money when you earned it before putting it into your TFSA, you won’t pay tax again when you withdraw it. This is the beauty of the TFSA: most of the time, whatever money you earn via your investments is tax-free. TFSAs, which are longer-term savings (investment) accounts, are an excellent way to aid in your retirement savings.
Limits on contributions
To encourage Canadians to save, the government established TFSAs in 2009. Most banks provide them, and anyone who is at least 18 years old and has a social insurance number (SIN) can open one.
However, there are restrictions on how much you can contribute to your TFSAs. There is a contribution cap for each year. All individuals, regardless of when they start, have the same opportunity to contribute to their TFSAs because the restrictions are cumulative.
Contribution limits by year
- 2010 – $5,000
- 2011 – $5,000
- 2012 – $5,000
- 2013 – $5,500
- 2014 – $5,000
- 2015 – $10,000
- 2016 – $5,500
- 2017– $5,500
- 2018 – $5,500
- 2019 – $6,000
- 2020 – $6,000
- 2021 – $6,000
- 2022 – $6,000
- 2023 – $6,500
Remember, if you are a newcomer, the contribution limit starts the year you land in Canada. For example, if you came to Canada in 2014, you will have a total contribution room of $56,000.00 by 2022.
Any money you withdraw from your TFSA can be contributed back in later years, and unused contributions rollover.
For example, if you arrived in Canada in 2008 and you’ve never made a TFSA contribution before, you can do so in 2022 up to a maximum of $81,500. That is obviously not feasible for the majority of people. But it also means that you have more leeway than simply the $6,000 annual cap if you’re just starting out with a TFSA and you happen to have some extra money this year, perhaps from a bonus at work or inheritance.
Be careful not to contribute more than what is permitted by the limits. A penalty of 1% per month on the extra money you contributed is assessed for over-contributing (putting in more than is permitted). Even if your excess contribution was an accident, this still holds true.
Things to remember
There are a few instances where TFSAs are not tax-free, despite the general rule. Any earnings from investments in American stocks and ETFs may be subject to non-resident withholding tax. If you make TFSA contributions during years when you are regarded as a non-resident of Canada, you will also be taxed on those contributions (for example, in years where you live outside Canada for most of the tax year).
Always check out www.canada .ca for the most up-to-date information, and if you like to learn more about TFSA, check out this article at canada.ca.
where to open a TFSA?
All the major banks in Canada offer TFSA accounts, but in my opinion, the fees are very high. Following are three of my favourite low-cost/free brokerages for opening a TFSA account, and you can get rewarded with cash, free stock or free trades by opening and funding your account using my referral links.
Wealthsimple
If you are just starting out, Wealthsimple might be a good recommendation because it doesn’t have any commission fees. When you open a trading account, you can get rewarded with up to $3,000 in cash to trade stocks or crypto commission-free using this link or entering my reference code: OFZZHW
INTERACTIVE BROKERS
InteractiveBrokers is the best low-fee brokerage account for anyone if you are trading a lot. In my opinion, it’s the best overall compared to Wealthsimple and Questrade. Open an account today using my link and start earning up to $1000 of IBKR Stock for free!
Questrade
Questrade is another Canadian low-cost brokerage. If you’d like to sign up for Questrade, use my referral Qpass Key 426019605447668 to get a $50 bonus.