Tax-Free Investment Accounts?

I feel that the Tax-Free Savings Account was poorly named.  In my mind, it should have been called the TFIA (Tax-Free Investment Account).  Bank tellers will often encourage you to make TFSA deposits, which, on the surface is a great idea.  However, they rarely ask if you have TFSA accounts at other institutions.  They also often suggest that, in your TFSA, you buy a high-interest savings investment.  On the surface, that may seem a good idea as well.  

This year’s contribution amount is $6,000 - up from $5,500 last year.  The TFSA started in 2009 and now, the cumulative deposit limit is $63,500.  This means that, if you have made all your TFSA contributions up to 2019, you will have deposited a total of $63,500.  Back in 2009, when you made your first $5,000 TFSA deposit, maybe a savings account type of investment was a reasonable idea.  Now that you may have a sizable amount of money in your TFSA, depending on your comfort level with risk and your long- and short-term objectives, you may be better off with an “I” investment in your TFSA rather than “S” savings in your TFSA.  Like an RRSP account, there are many investment options available for your TFSA which can provide you with much higher returns over the long term.

Now back to the CRA.  When you over-contribute to a TFSA account in any given year, the CRA will penalize you 1% of the over-contribution for each month you are over your limit.  The nature of the TFSA account is such that you can draw money out and then re-contribute what you took out again, but not until the following calendar year.  Often, bank tellers will pay no mind to what you have drawn out and what you have contributed.  They will tell you the TFSA is a great savings account and that you can add and withdraw money anytime.  They also won’t ask if you have TFSA accounts at other institutions, thus, exacerbating your risk of over-contribution. 

We work very hard to make sure our clients do not over-contribute – which can be quite the task.  I tell all my clients that a TFSA account is a great thing and that we would be happy to help them set one up with the most suitable investments possible.  But we ask that if you have a TFSA account with us, that you only have one with us, and that you do not set a TFSA account up elsewhere.  The reason for this is that we really do not want to inadvertently have you go over the contribution limit and thus incur an over-contribution penalty with the CRA.  The CRA used to be lenient with TFSA over-contributions.  It appears that they have been busier lately sending penalty letters out to people.   We want to avoid this if we can.

Chris Eynon is a Financial Advisor with RGF Integrated Wealth Management. The views expressed are those of the author and not necessarily those of RGF Integrated Wealth Management, which makes no representations as to their completeness or accuracy.

© 2019 RGF Integrated Wealth Management. Ltd., RGF Wealth Management. Ltd., Member - Canadian Investor Protection Fund

Why do we plan?

Knowing where you are translates into knowing where you're going, and we hope to provide every client with the trust and confidence to navigate through the waters of their financial lives.

Learn More