TFSA is one of the best investing accounts in Canada with its tax-free feature. Capital gains and dividends on a non-registered account are taxable. On the other hand, investment gains on a TFSA are tax-free.
TFSA are mostly exempt from taxes. Investment income on a TFSA such as capital gains, dividends, and interest earned are not taxable, even when withdrawn. However, TFSA has a contribution limit amount. Deposits above the TFSA limit will have a penalty of 1% tax per month by the CRA.
While TFSA is for the most part tax-free, not all dividends received in a TFSA are completely tax-free.
TFSA Capital Gains Tax
Capital gains on investments in a TFSA are tax-free. Capital gains on a TFSA do not have to be declared on the income tax return. At the same time, capital losses on a TFSA are not tax deductible. Also, deposits to TFSA are limited up to the TFSA limit amount.
Capital gains on stocks in the United States and Canada are tax-free in a TFSA. Gains on a TFSA are generally tax-free, even when sold or withdrawn.
TFSA Dividends Tax
Dividends on a TFSA are typically tax-free. Dividends from Canadian stocks and ETFs on a TFSA are tax-free. However, dividends in a TFSA from United States stocks may be subject to a 15% withholding tax.
Dividends from foreign stocks and assets in a TFSA may be subject to withholding taxes.
TFSA Dividends on US stocks – Withholding Taxes
| Amount of Dividends (US stocks – ex. Apple and Walmart stock) | Withholding Taxes (15%) | TFSA Dividends (After Tax) |
| $100 | $15 | $85 |
| $500 | $75 | $425 |
| $1,000 | $150 | $850 |
| $2,000 | $300 | $1,700 |
In comparison, dividends from Canadian stocks are tax-free in a TFSA. Thus, the full $100 or $500 in dividends are tax exempt since there are no withholding taxes for Canadian stocks.
TFSA Tax from Over Contributions (1% Monthly Tax Penalty)
Since gains on a TFSA are tax-free, what is stopping everyone from investing everything in a TFSA to avoid taxes? This is why TFSA has a limit on the amount o contributions anyone can make. The TFSA limit has been around $6,000 per year.
Deposits above your TFSA limit are subject to a 1% tax per month by the CRA until you withdraw them.
| TFSA Over Contribution | 1% Penalty Tax per Month | Yearly Equivalent (12 Month) |
|---|---|---|
| $100 | $1 | $12 |
| $500 | $5 | $60 |
| $1,000 | $10 | $120 |
| $5,000 | $50 | $600 |
| $10,000 | $100 | $1,200 |
In addition, investment income from over contributions may be fully taxable by the CRA as a penalty.
For further information about the TFSA Contribution Limit, check out the Full Details (with examples) about the TFSA limit to avoid the penalties and stay below the TFSA limit.
(Insert TFSA limit article)
TFSA Withdrawal Tax
TFSA withdrawals are tax-free and do not count as taxable income. TFSA withdrawals are always not taxable with no limit on the number and amount of withdrawals. You can withdraw cash from a TFSA anytime.
Also, the contribution room is not lost when withdrawing from a TFSA. The amount of TFSA withdrawals for a year will be added to your TFSA Contribution limit in the next calendar year.
TFSA Stocks Tax
Investment gains from stocks in a TFSA are exempt from taxes. Dividends and capital gains on stocks in a TFSA are generally tax-free. However, dividends from stocks on United States such as Apple and Walmart stock may have a 15% withholding tax. Dividends on Canadian stocks in a TFSA are tax free.
TFSA Taxes on US stocks
Capital gains on US stocks in a TFSA are tax-free. Dividends on US stocks in a TFSA may be subject to a 15% withholding tax.
TFSA Interest Tax
Interest earned on a TFSA is not taxable with no limit. Unlike most savings accounts where interest is taxable, interest income on a TFSA Savings Account is tax-free and does not count as taxable income.
Day Trading Taxes on a TFSA
Day trading is not allowed on a TFSA. CRA prohibits business activity such as day trading in a TFSA. Day trading may be classified as a business income, which is taxed similar to employment income. TFSA (Tax-Free Savings Account) is designed for medium to long-term savings.
At the same time, rebalancing a portfolio and thus, buying multiple stocks in a day to hold several months to years is allowed on a TFSA. CRA has several criteria to classify what constitutes a business activity.
Should you do day trading business activity in a TFSA, CRA may audit you and ask for the taxes owed.
Furthermore, losses on a TFSA are not tax deductible. Day trading should be done on a regular non-registered account which can be called cash, margin, or personal account depending on the investing platform.
Losses on business activities (such as day trading) in Canada are usually tax deductible. Any expenses from business activities may be tax deductible.
How to Open a TFSA Account in Canada
TFSA accounts are offered by most investing Financial Institutions and banks in Canada. There are several types of TFSA accounts for different investments.
- TFSA Savings Accounts – savings account and GICs
- TFSA Managed Accounts – capital will be automatically invested
- TFSA Self-Directed Accounts – stocks, bonds, ETFs, mutual funds, etc. of your choice
Related Post: How to Start Investing in Stocks in a TFSA (5 Steps)
How do I avoid TFSA taxes?
Capital gains and dividends are usually taxable. In Canada, investment gains on a TFSA are tax-free. Thus, taxes on gains are avoided through a TFSA. However, you can just deposit around $6,000 per year on a TFSA.
TFSA (Tax-Free Savings Account) is an investment account introduced by the government of Canada more than a decade ago. Most people invest in stocks, ETFs, mutual funds, or as a savings account in a TFSA. Interest earned on savings in a TFSA is tax-free.
Do I have to report my TFSA on tax return?
TFSA does not have to be reported on tax returns since TFSA is already tax exempt. Investment appreciation on a TFSA and interest income is already tax-free. TFSA income is not taxable income.