Maximizing Your TFSA

  1. Types of Investments
    Since interest is taxed at a higher rate than dividend and capital gains it is more beneficial to maximize your contribution room with interest-earning investments such as variable saving accounts and term deposits. In addition, your TFSA will not allow you to take advantage of capital losses. As a result, speculative investments such as stocks should be managed outside your TFSA. Doing so will allow you to carry capital losses forward or back to reduce the capital gains in other years.
  2. Foreign Tax Credit
    Even though dividends from foreign sources do not receive the same preferential tax treatment as Canadian dividends, it might not be beneficial to put dividend-paying foreign investments into a TFSA. By placing them in a TFSA you will not be able to take advantage of the foreign tax credit, which results from foreign withholding tax on dividends.
  3. Optimizing Government Benefits
    Since investment income within Tax-Free Savings Accounts doesn’t affect government benefits, it is advisable for retired Canadians and low-income households to put investments that pay Canadian dividends into their TFSA. This will eliminate the gross up and reduce taxable income. As a result, it may be possible to increase government benefits that are based on income.
  4. Compounding Effect
    By annually contributing the maximum amount to your Tax-Free Savings Account you will have optimized the earning potential by allowing your investment income to accumulate tax free. Since there is no restriction as to when you can contribute, it is advisable to transfer funds into your TFSA as soon as possible.
  5. Spousal Contributions
    If you are married or in a common-law relationship, make sure that both of you contribute the maximum amount allowed. Since investment income is sheltered from taxation, contributions are not subject to the attribution rules.

View frequently asked questions about Tax-Free Savings Accounts.

If you want to estimate how much money you could save, visit the Tax-Free Saving Account Calculator.

To open a TFSA, visit your Community Savings branch.