Since 2009, the Canada Revenue Agency has allowed any Canadian resident over the age of 18 with a Social Insurance Number to open a Tax-Free Savings Account (TFSA). All income generated by eligible assets held within the TFSA is tax-sheltered, provided certain rules are followed, such as contribution room limits. Therefore, this savings vehicle can be one of the best financial tools for many savers.

For many people, a savings account is a banking product that generates very little interest, often less than 0,1% for most financial institutions. However, the two terms that follow "savings account," namely "tax-free," are too often misunderstood.

Regarding eligible assets or permitted investments, the list is much longer than you might think. Of course, you can use your TFSA contribution room and leave the funds in cash or in a Guaranteed Investment Certificate (GIC), just like any other savings account. However, a TFSA's value becomes apparent when you use your contributions to generate significant profit potential, whether through mutual funds, bonds, publicly traded securities, or even certain shares of small businesses.

It's important to understand contribution room and how it accumulates throughout our lives. Between 2009 and 2012, every adult could contribute $5000 annually, cumulatively and retroactively. In other words, someone eligible who didn't contribute can now contribute $20000 to make up for those years. Then, in 2013 and 2014, the amount was reduced to $5500, so $11000 was added to the contribution limit. The $10,000 contribution limit set by the Harper government in 2015 was not repeated after the Liberals came to power, as they lowered it to $5500 for 2017 and 2018. The intention of the annual contribution limit is to be indexed, and for this reason, it rose to $6000 in 2019, 2020, and 2021 until inflation brought it back down to $6500, and so on. To recap, since 2009, the lifetime contribution limit has been $75,500.

The withdrawal rule and the January 1st rebalancing. While a TFSA is very flexible for tax-sheltered savings, it's important to know that you can't both withdraw and deposit funds into your TFSA in the same year if you've already reached the lifetime contribution limit. Here's an example:

Mr. Tremblay, who has maximized his TFSA contributions every year since 2009, has accumulated $75500 in it plus $10000 in interest. If Mr. Tremblay wants to withdraw funds from his TFSA, he will have to wait until January 1st to be able to re-contribute the same amount plus a new $6000 contribution.

However, it is possible to increase your TFSA contribution room. Let's take the same example as Mr. Tremblay.

Since he has accumulated $85500 since 2009, he could withdraw it all in 2021 and contribute another $85500 on January 1, 2022, plus his new $6000, for a total of $91500. But be careful, this same rule applies in reverse. If Mr. Tremblay had lost money due to poor investments and his TFSA was worth $68000 before the withdrawal, his already reached contribution limit would be lost forever. He could therefore only contribute that same $68000 plus a new $6000 on January 1.

You can find out your contribution limit on the Canada Revenue Agency website under “My Account” or simply call the 1-800-267-6999In conclusion, the rules surrounding TFSA contributions are relatively simple to follow, and this savings vehicle should be an integral part of most savings strategies. To determine what proportion of your savings budget to allocate to it, we encourage you to consult one of our advisors who can analyze your personal situation.