7 TFSA Rules That Everyone Should Know

Curious what all the hype is about the TFSA?

Or have you already registered for a TFSA, but need to look at the finer details?

Are you using your TFSA’s to their full potential?

You think: Well, what exactly should I do? What can I do? What can’t I do?

In this post, you’ll learn a few essential TFSA tips and restrictions to help you use your TFSA to its full potential while staying within the guidelines.

7 Most Important TFSA Rules

The TFSA, while popular, has many rules and strategies that you might not be aware of.

Below, you will learn a few strategic ways to use your TFSA.

1. TFSAs Coming of Age

Unlike RRSPs, you need to be the age of majority defined by your province of residence to open a TFSA.

If you live in Alberta, Manitoba, Ontario, Prince Edward Island, Quebec or Saskatchewan, you can open one as soon as you turn 18.

Otherwise, you’d have to wait until you are 19.

But don’t worry, your contribution room starts growing the year you turn 18 regardless of which province you live in.

So, you might not get to contribute right away if the age of majority in your province is 19, but you also won’t be left behind in terms of lifetime contributions.

Key Insight

Your contribution rooms begins accumulating the year you turn 18, regardless of how old you need to be to open a TFSA.

2. Can You Open a TFSA?

As mentioned, you first need to be old enough to open a TFSA.

Second, and this may go without saying, you need to be a resident of Canada.

You also need to have a valid Social Insurance Number (SIN).

While non-residents can open and contribute to a TFSA, any contributions made while a non-resident will be subject to a 1% per month tax until you withdraw those contributions from the account.

Lady researching TFSA rules

3. How to Transfer Your TFSA to Another Bank (The Right Way)

It might seem straightforward to open another TFSA, withdraw from your old one and make a new deposit, as there aren’t any penalties for doing this with a traditional bank account.

The thing is, transferring your TFSA balance this way could cause severe overcontribution and potentially cost you a lot in penalty tax.

To avoid penalty tax, you need to leave everything in your current TFSA, and when opening the new one, talk with your provider about an account transfer.

An account transfer will transfer your holdings (or balance, if you choose) over to your new TFSA without withdrawing and potentially overcontributing.

There might be a fee to do this, but most banks will reimburse you for gaining you as an account holder.

Don’t Forget!

Do not withdraw from one TFSA and deposit to another to make a transfer as it could trigger an over-contribution.

4. Tax Planning

You might not be aware that you are allowed to withdraw from your TFSA just to deposit it into your RRSP and repurchase the same investment.

This could be a viable option if you have reasons to lower your taxable income, such as qualifying for government benefits or having an annual income in a higher tax bracket.

You could even deposit the tax refund you get from the RRSP contribution back into your TFSA to replace some of your withdrawal (as long as you have available contribution room).

5. What Can You Hold In Your TFSA?

You can hold many types of investments in your TFSA.

Below is a list of examples:

  • Mutual funds
  • Stocks and Warrants
  • Bonds
  • ETFs (Exchange Traded Funds)
  • GICs (Guaranteed Investment Certificates)
  • Options
  • Plain old cash

You can’t, however, hold futures contracts or other derivatives.

One thing to mention is that while you can hold US and foreign securities in your account, you will be subject to withholding tax on these holdings.

The TFSA’s cousin, the RRSP, has a tax treaty with the US, so the withholding tax on US securities is recoverable.

With a TFSA, no such tax treaty exists.

Although you don’t have to pay any Canadian tax on your investment earnings, your return will lag a bit due to the foreign withholding tax.

6. Can You Trade Stocks In a TFSA?

While you aren’t allowed to trade stocks in the sense of actively buying and selling to take advantage of minor price fluctuations, you are authorized (even encouraged) to hold stocks in your TFSA.

You need to make sure you are investing rather than trading.

The Canada Revenue Agency (CRA) will audit investors that are frequently trading within their TFSA.

The variables the CRA uses to differentiate trading from investing includes the frequency of your transactions and the duration of your holdings.

You may even choose to open a self-directed TFSA which lets you pick and choose the stocks on your own without the guidance of an advisor.

However, if you decide to go this route, unlike with a non-registered account, you won’t even get an option to short a stock as that is strictly a trading tactic.

Key Insight

You could be penalized if you use your TFSA for active trading.

7. The TFSA Retirement Plan

You may already know about the CPP (Canada Pension Plan) and OAS (Old Age Security) as part of your retirement income.

The more income you earn reduces the amount you can receive from the CPP and OAS.

A TFSA has the potential to let you keep receiving the maximum amount of benefits you are eligible for, while still living a comfortable retirement.

As mentioned, the amount of OAS benefits you receive will start to be reduced as your income starts increasing.

However, any growth that takes place inside of your TFSA does not count as income when you withdraw it, meaning it won’t affect your government pensions.

This is excellent news, for if you are just starting your career as a TFSA has the potential to be the only retirement account, you will ever need.

Considering that if you max out your TFSA every year after turning 18 and earn a healthy return, you could end up quite wealthy by the age of 65.

The best part is all that wealth is essentially “hidden” from your income.

Therefore, you will continue to receive the maximum you are eligible for from CPP and OAS.

Frequently Asked Questions

  • What assets are not allowed to be held in a TFSA
  • Can I have 2 TFSA accounts?

Paul Woodland is the dreamer behind the thediyinvestor.ca blog, where he hopes to teach all Canadians how they can become disciplined, self-managed investors. He truly believes anyone can learn to manage their portfolio themself with the proper guidance.

He’s been studying personal finance on his own since 2008, starting with the basics of budgeting and money management and eventually graduating on up to different self-directed investment strategies.

Paul is known to get passionate whenever mutual funds or life insurance gets brought up in conversation. He even convinces teenagers to live with their parents longer to focus on other financial goals like saving and investing.

His proudest moments are getting feedback and gratitude from the people he helps to understand their finances.