Four Ways to Gain with TFSAs

The main idea behind the Tax-Free Savings Account (TFSA) is to give Canadians a mechanism to save (and invest) money in a tax-free way. Under the program, any funds that are invested into a TFSA, and any returns on those funds, either through interest or other growth, will (generally) be non-taxable on withdrawal from the TFSA. The following sections will describe four ways to gain from using a TFSA.

1. Take a Long View

TFSAs are being promoted as a savings vehicle for everything from emergency funds and next year’s vacation to an alternative to RRSPs. The value in TFSAs is as a long-term program for building additional wealth tax-free.

2. Make the Most of the “Tax-Free” Benefit

Investing TFSA assets in savings accounts and other low returning investments may be appropriate in the short term. However, TFSAs are most advantageous when you can maximize the tax savings and that means focusing on higher growth investments (such as equities).

Add TFSAs to the long-term portion of your portfolio in keeping with your overall asset mix to see the most benefit. Consider holding investments that have potential to increase in value in a TFSA. If you wish, the investment earnings can be taken out tax-free and will give you additional TFSA contribution room.

3. Make TFSAs a Family Affair

Want to give money to your adult children? Looking to income split with your spouse? With no tax on investment earnings, and therefore no need for attribution rules, you can fund the TFSA of any Canadian resident over the age of 18 without affecting your TFSA contribution room or worrying about tax consequences. What’s more, if your spouse or child withdraws money from the TFSA, you can add it back in the next year. It’s an ideal way for parents to help adult children acquire the funds for a first home, vacation property or private school tuition for their children.

4. Use the Beneficiary Designation

Name your spouse/partner as the beneficiary of your TFSA assets and after your death, he or she can roll the funds into his or her TFSA without concern about tax. If you have unused TFSA contribution room, your spouse/partner can top up your TFSA before the rollover.