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SEPTEMBER 24, 2021
By Jillian Stinson 

Read time: 4 minutes

The tax-free savings account (TFSA) lets you stash extra cash for just about anything. You can use it for rainy-day savings, a new house or retirement. 

To put it simply, a TFSA lets you save up money without paying any tax on: 

  • the growth within the account, or 
  • withdrawals. 

Still, since the Government introduced the TFSA in 2009, it’s estimated only 50% of Canadians have opened one. Why? Maybe because they don’t realize what a great savings option the TFSA can be. To help clarify what it is and how it works, we’ll answer 6 questions about TFSAs.

Article content

  1. Can you hold any type of investment in a TFSA?
  2. Can you have more than one TFSA?
  3. Can you deduct TFSA contributions on your tax return? 
  4. Can you use a TFSA as an emergency fund?
  5. Can you use a TFSA for income splitting?
  6. Can you name your spouse as a successor or beneficiary?

Need help with a TFSA? 

Talk to your advisor, or find an advisor, to see how a TFSA fits into your savings plan. 

1. Can you hold any type of investment in a TFSA?

From our earliest days, a “savings account” was where money went when it came out of the piggy bank. The name suggests deposits, safety and low rates. But almost any investment you can hold in a registered retirement savings plan (RRSP) can also go into your TFSA. This includes bonds, stocks, mutual funds, etc. 

Maybe the name is causing confusion? Many banks and financial institutions advertise a set percentage for their cash TFSAs and it’s very low. The TFSA is a savings shelter similar to an RRSP, and you need to choose the investment that goes within it.

2. Can you have more than one TFSA? 

You’re not limited to how many TFSAs you can have. In fact, you can have as many TFSAs as you’d like. But there’s a limit to the total amount you can contribute to your TFSAs. Whether you have one or multiple accounts, the annual TFSA limit (or the total contribution room) is per person, not account.

Are there concerns with having multiple TFSAs? There really isn’t a big risk to holding multiple TFSAs. But there are two things to consider:

1. Risk of over-contributing. The biggest concern is not keeping track and possibly over-contributing. Over-contributions to TFSAs are subject to a 1% penalty tax per month (only on the over-contribution amount). So, if you open more than one TFSA, make sure you have a way to track your contributions. 

  • If you do over-contribute, don’t worry too much. You can fix it. 

2. Possibly paying more in fees. If you have multiple managed accounts that charge fees, then consolidating your accounts in one place may be wise.

3. Are TFSA contributions deductible on your tax return?

Unlike an RRSP, contributions to a TFSA are not deductible for income tax purposes. Since you contribute after-tax money to a TFSA there’s no tax on the amount invested or any growth when you withdraw it.

4. Can you use a TFSA as an emergency fund?

You can use a TFSA for your existing savings, even if they’re relatively modest. You can access the money at any time, if you don’t lock the funds into a non-redeemable investment. This also makes a TFSA perfect to use as an emergency fund to help you get through unexpected events (like a global pandemic). You’ll have the security of knowing the money will be available if you need it.

5. Can you use a TFSA for income splitting?

You can use your TFSA as an income-splitting tool to lower your family’s overall tax bill. It works when the higher-income spouse gives money to a lower-income spouse to contribute to their TFSA. The higher-income spouse doesn’t get a tax deduction, like they would with a spousal RRSP, for example. Still, the benefit is the interest earned on the money invested in a TFSA isn’t taxed. There are potential negative tax implications when attempting such a maneuver using non-registered investments. Talk to an advisor about what might make sense for you. 

6. Can you name your spouse as a successor or beneficiary?

For estate planning purposes, you have two options to leaving your TFSA to a spouse. You can name either:

  • A successor, where investments can continue to grow and can be withdrawn tax-free. (Note: You can only name spouses, including common-law partners, as successor of a TFSA).
  • A beneficiary, where the surviving spouse could pay taxes on any interest or growth earned in the TFSA after their spouse’s death.
  • The surviving spouse has the option to add the value of their deceased’s spouse’s TFSA (based on the fair market value at death) to their own TFSA. They can do this without affecting their unused contribution room. They can make an exempt contribution by completing the CRA’s Form RC240. This must be done within 30 days after they contribute.
  • Need to change your beneficiary? If you’re a Sun Life Client, find everything you need to know about how to change your beneficiaries on sunlife.ca. 

The rules can be complicated (and different in Quebec). So, it’s a good idea to talk with an advisor about your options. 

Need help saving? 

A Sun Life advisor can help you make decisions and maximize your savings. Most advisors now offer to meet Clients virtually by video chat. I want an advisor.

Do you have more questions? Here are the answers to some commonly asked questions about TFSAs .

Let us guide you

 

Need help figuring out what’s right for you?

An advisor can help put together a solid plan that suits your goals.

This article is meant to only provide general information. Sun Life Assurance Company of Canada does not provide legal, accounting, taxation, or other professional advice. Please seek advice from a qualified professional, including a thorough examination of your specific legal, accounting and tax situation