TFSA (Tax-Free Savings Account) was introduced on 2009. Profits from investments inside a TFSA account are tax free. TFSA is available to everyone over 18 years old with a valid SIN number.
Investments in a TFSA account include GICs, savings accounts, stocks, bonds, mutual funds, and ETFs. Most of these investments (except GIC) can be sold and withdrawn anytime. TFSA GICs and TFSA Savings accounts are low risk investments while stocks and mutual funds are generally considered high risk.
At the same time, stocks and mutual funds have higher potential returns compared to savings accounts and GICs. All of these can be invested inside a TFSA account. Different Financial Institutions offer different investments.
Deposits to a TFSA Savings account will automatically earn interest income. On the other hand, stocks, mutual funds, or ETFs need to be manually purchased for self-directed TFSA accounts. Deposits to a TFSA self-directed is not automatically invested.
Multiple TFSA accounts can be opened at any one time. However, TFSA have a contribution limit. The total deposits on all TFSA accounts combined must be below the contribution limit of a person.
More details about Contribution Limit after the Investment Options section of this article.
1. TFSA GIC
GICs (Guaranteed Investment Certificate) pay a certain interest rate for a fixed period amount of time. GIC term lengths commonly range from 3 months to 10 years. For the most part, funds on a GIC can only be withdrawn after the term length of a GIC.
GICs typically earn a higher interest rate compared to savings accounts since funds on a GIC are locked in for the term length chosen. On the other hand, funds on a TFSA Savings account can be withdrawn anytime.
How GIC Works
For example, a 3 Year $10,000 GIC with an interest rate of 1% (per year) is purchased.
| Year 0 (Start Date) | Pay -$10,000 |
| Year 1 | Receive +$100 interest income |
| Year 2 | Receive +$100 interest income |
| Year 3 | Receive back +$10,000 initial capital |
| Year 3 | Receive +$100 interest income |
Interest income are commonly paid on the anniversary date or on the maturity date of a GIC. Most Financial Institutions give GIC owner the option when to receive the interest earned.
For all GICs, initial capital are received at the maturity date. Interest rates are expressed on a per year basis. For instance, a 6 month GIC will pay 6/12 (half) of the yearly interest income.
For short term GICs (ex. 6 month GIC), interest income are commonly paid out at the maturity date.
Interest income of a TFSA GIC are paid to a TFSA Savings account. Money inside a TFSA Savings account can be withdrawn anytime and transferred to a regular savings or chequing account.
Withdrawals from a TFSA account are added to next year’s contribution limit.
| TFSA Accounts | Kinds of Investments |
| TFSA Savings Accounts | GICs or savings account |
| TFSA Self-directed | Stocks/ETFs/Mutual Funds/ Bonds |
To invest on TFSA GICs, most Financial Institutions require to open a TFSA Savings account. Money from a TFSA Savings account can be used to purchase a GIC for a higher interest income. Interest income on GICs inside a TFSA Savings account are tax free.
2. TFSA Savings Accounts
TFSA Savings account works like a regular savings account. Interest income are paid every month. Funds are available for withdrawal anytime.
Similar with all investments on a TFSA account, interest income on a TFSA Savings account are tax free.
TFSA Savings account and GICs have little to no risk. After all, money is paid back at the maturity date plus interest income for GICs. Money inside a TFSA Savings account is accessible anytime.
As such, returns on a savings and GIC accounts are lower compared to potential returns on other investments such as stocks, mutual funds, and ETFs.
At the same time, stocks and other assets are riskier. The worst case scenario for a stock is when a company go bankrupt. When it does, its stock price will be $0.
The stock market index S&P 500 tracks the returns on 500 largest stocks (companies) in America. On 2008 and 2020 stock market crash, the S&P 500 have lost 50% and 35% of its value at the lowest point.
3. TFSA Stocks
Stocks are small ownership of a company. There are two ways of making money from stocks: dividends and/or capital gains. Capital gains occur when selling a stock at a higher price than the price when it is bought.
All dividends and capital gains from stocks inside a TFSA account are tax free. Similarly, capital losses on stocks inside a TFSA account are not tax deductible.
Dividend Stocks vs Growth Stocks
Dividends are money paid from a company. Dividend stocks commonly have limited upside potential and do not have much growth. A reliable dividend stock typically pays around 4% dividends per year.
Ideally, a company should be making enough profits to afford dividends. When company’s profits is not enough, dividend payments can be cut off in the future.
For more details about dividend stocks, visit this in depth article I wrote. (This includes how to do research on dividend stocks.)
Dividend stocks usually have lower upside potential while growth stocks have higher potential upside. At the same time, growth stocks are considered riskier compared to dividend stocks since growth stocks have little to no profits.
Although there is no fixed dividing line between the two, most dividend stocks have P/E ratios below 25 while growth stocks have P/E ratios of more than 50. Most growth stocks may have no P/E ratio since they may have little to no profits.
Growth stocks are companies that are growing 30% or more in revenues per year. Most growth stocks do not make profits and some are willing to lose money for future growth. Also, most growth stocks prefer to reinvest capital for future growth instead of paying dividends.
In general, short term stock prices are unpredictable. Nobody can predict stock prices in the short term.
In the long run, fundamentals of a company matters. When revenues and profits of a company grow 5 times or more in several years, the stock price of a company will likely increase.
4. ETFs (Exchange Traded Funds)
Investing on individual stocks can be risky. Diversifying between different stocks may help to reduce risk. For example, investing on only one stock that crash 50% will result to a 50% loss on investment.
On the other hand, assume a person invested on 5 stocks and 4 of them stayed flat while one stock crashed 50%, the overall portfolio will lose only 10% because of diversifying investments with multiple stocks.
The most common use of an ETF is to track returns of a group of stocks. For example, VSP and SPY are S&P 500 ETFs. Instead of purchasing 500 stocks individually, investing on VSP or SPY is an easier way to invest on the S&P 500.
ETFs (Exchange Traded Funds) are funds that tracks the return of a group of stocks (index), commodities, or a mix of different assets. Similar to stocks, ETFs can be bought or sold whenever the market is open (9:30 am to 4 pm ET, Mondays to Fridays).
In the past year (July 2021 – July 2022), the actual S&P 500 index have gone up by 38.49%. In the same time period, SPY ETF is up 38.33% for the year.
ETFs charge a yearly fee. Common ETFs like S&P 500 ETFs charge lower fees of around 0.10% every year.
Investing on ETFs such as S&P 500 ETF is one way to passively invest in stocks without doing the research to choose what stocks will give the highest returns. After all, ETFs will give the combined returns of all stocks in a particular index or sector.
Also, there are ETFs for dividend stocks, financial sector stocks, energy stocks, and renewable energy stocks. In addition, ETF can track the price of commodities. There are ETFs that tracks the price of oil, copper, corn, soybeans, and wood.
For instance, let us say the price of oil have gone up by 10%. When this happens, an oil ETF will also go up by 10%. Similarly, an oil ETF would go down by 10% if the price of oil has become 10% cheaper.
5. Mutual Funds
Mutual funds are funds that are managed by professionals. Professionals invest money on a mix of different assets such as stocks and bonds. Mutual funds charge around 1-2% management fees every year.
Professionals decide when to buy and sell stocks and other assets inside a mutual fund.
To buy or sell mutual funds, most Investment Dealers charge around $10 per trade in addition to the 1-2% fee per year the mutual fund charges.
Mutual Fund Returns
CNBC Article: Active fund managers trail the S&P 500 for the ninth year
Key Points of the CNBC Article: (Source)
- For the ninth consecutive year, the majority (64.49 percent) of large-cap funds lagged the S&P 500 last year.
- After 10 years, 85 percent of large cap funds underperformed the S&P 500, and after 15 years, nearly 92 percent are trailing the index.
From 2009 to 2019 (10 year period), 85% of (large-cap) mutual funds have lower returns compared to the S&P 500. Only 15% of mutual funds have beat the market (S&P 500) returns on that time period.
According to the article, 85.7 of small-cap and 88% of mid-cap mutual funds have underperformed their comparable indexes. Thus, only 10-15% of small and mid-cap funds have beat the market.
Large-cap funds primarily invests on big companies (stocks) that have a market value of more than $10 billion. S&P 500 returns is compared to the large-cap funds since the 500 stocks have a market capitalization of more than $10 billion each.
For example, Apple stock, Amazon stock, and Microsoft stock are valued more than $1 trillion each at the time of this writing (2021). These stocks are among the largest companies on the S&P 500.
6. Bonds
Bonds are essentially debt of a company or government. Companies and government issues debt that investors can buy. Bonds pay interests called the “coupon payment” which is usually paid semi-annually.
Bonds is very similar to a GIC. The minimum investment on a bond is around $5,000 in Canada.
Government bonds are commonly known in finance as the “risk-free” asset since governments can simply print money if they cannot afford to pay debt. The only risk to government bonds is called the “inflation risk”, that is, when the value of a currency is devalued.
How Bonds Work
Let us say I purchased a $5,000 bond at face value with a coupon rate of 1% that pays semi-annually.
After 6 months, $25 (1% x $5,000 x 6/12) interest is received. At the maturity date (after a year), $5,000 plus $25 is paid back. If this is a corporate bond and a company go bankrupt, the $5,000 may not be paid back.
Bonds can also be sold before the maturity date of a bond, but the calculation may be complicated. Also, you need other people to buy a bond from you when selling a bond.
Requirements to Open a TFSA account
- Be at least 18 years old
- Have a valid SIN number
TFSA Contribution Limit
- Withdrawals are added back to the next year’s contribution limit
- Additional contribution limit is added every January 1
- Unused contribution limit will carryforward to future years
- Deposits above the contribution limit are subject to 1% monthly taxes by the CRA
TFSA started with a contribution limit of $5,000 on 2009. New contribution limit adjusts for inflation every year. Here is a table below for full contribution limit every year.
| Year | Contribution Limit |
| 2021 | $ 6,000.00 |
| 2020 | $ 6,000.00 |
| 2019 | $ 6,000.00 |
| 2018 | $ 5,500.00 |
| 2017 | $ 5,500.00 |
| 2016 | $ 5,500.00 |
| 2015 | $ 10,000.00 |
| 2014 | $ 5,500.00 |
| 2013 | $ 5,500.00 |
| 2012 | $ 5,000.00 |
| 2011 | $ 5,000.00 |
| 2010 | $ 5,000.00 |
| 2009 | $ 5,000.00 |
Example 1
A person turned 18 on 2015 and have a valid SIN number since 2015. Assuming Person A never deposited any amount to a TFSA account, the contribution limit from 2015 to 2020 will carryforward to 2021.
On 2021, Person A will have a contribution limit of $44,500.
Example 2
Person B have maxed out TFSA contribution limit on 2019 and previous years. On 2020, Person B deposit $3,000 to a TFSA account with Bank A and another $2,000 deposit to a TFSA account with Bank B.
On January 1, 2021, Person B will have a new contribution limit of $7,000 (new limit of $6,000 + unused limit of $1,000).
Example 3
Person C turned 18 on 2020 and deposit $5,000 to a TFSA account. Person C withdraw $1,500 on August 2020 and another $500 withdrawal on October 2020. On 2021, the new contribution limit will be $9,000 (unused $1,000 + $2,000 previous year’s withdrawals + new $6,000 limit).
To skip calculations, TFSA Contribution Limit can also be found on a CRA (Canada Revenue Agency) Individual account. CRA updates the TFSA Contribution Limit amount every January.
Can you lose money in a TFSA?
Risk on losing money in a TFSA depends on the investments inside a TFSA account. TFSA GIC and Savings account have little to no risk. People can lose money in a TFSA by investing in stocks, mutual funds, or ETFs since these investments have higher risk and higher potential returns.
Losing money in a TFSA account will not result to any tax deductions. This can happen when the price of a stock, mutual fund, or an ETF inside a TFSA account is sold at a lower price. When investments go down, a person can either hold or switch investments by selling and buying other assets.
Switching assets may result to a commission fee which depends for every kind of investments.
How does TFSA investment work?
Profits from investments like stocks, ETFs, and GICs inside a TFSA account are tax free. A TFSA Savings account works similar to a regular savings account since it earns interest income. Most investments inside a TFSA account can be withdrawn anytime.
Can you have 2 or more TFSA accounts?
Multiple TFSA accounts can be opened at any one time. The only restriction is that the total combined deposits to TFSA accounts must be below your contribution limit. Amounts deposited above the contribution limit are subject to 1% per month tax by the CRA.