2024-03-12T11:02:19-04:00Jul 26, 2023|

Tax-Free Savings Accounts (TFSA) for newcomers: Investing in Canada

As a newcomer, you may want to begin investing and saving for your future shortly after moving to Canada. You might be in a position to set aside a portion of your income every month or have savings that you brought from home. Opening a Tax-Free Savings Account (TFSA) can be a good investment option for newcomers.

An RBC poll revealed that 71 per cent of newcomers who have been in Canada for five years or less own an investment product and, among them, forty percent had invested in TFSAs, making it the most popular investment option.

In this article:

What is a TFSA?

TFSA stands for Tax-Free Savings Account. A TFSA is a registered account designed to help you save money and earn tax-free returns.

Who can open a Tax-Free Savings Account?

To be eligible to open a TFSA, you must:

You do not need to have a job in Canada or earn an income here to qualify for a TFSA. As a new permanent resident who’s over the age of majority, you can open a TFSA immediately after getting a SIN and start saving right away!

TFSA contribution room

There is a limit on the amount you can deposit in a TFSA each year. The TFSA annual room limit varies for each year. It’s indexed to inflation and rounded off to the nearest $500. For 2023, the annual contribution room limit (also known as the TFSA dollar limit) is $6,500.

Only funds that you deposit or transfer to your TFSA count as contributions. Investment income or earnings on funds already in your TFSA are not considered contributions and will not affect your contribution room.

You don’t necessarily have to use your entire contribution room each year. Your unused TFSA contribution room accumulates and can be carried over to the following year. For instance, if the annual limit is $6,500, and you contribute $4,000 during 2023, the unused contribution of $2,500 will be added to your contribution limit for 2024. So, if the limit set for 2024 is $6,500, your total available contribution room will be $9,000.

As a newcomer, your contribution room starts accruing the year you become a resident of Canada, even if you don’t open a TFSA in your first year. This means that if you became a PR of Canada in 2023, but only open a TFSA account in 2024, your contribution room will be $6,500 plus the annual contribution room for 2024.

Overcontribution tax for TFSA

If you contribute more than the available contribution limit in a given year, you’ll have to pay an overcontribution penalty equal to one per cent of the maximum excess contribution in your TFSA per month until the extra funds are removed from your account. 

For example, in 2023, if you’ve contributed $7,000 to your TFSA by July, even though your available contribution room was only $6,500, you’ll need to pay a penalty of one per cent of ($7,000-$6,500) 

= 1% of $500 

= $5 per month until you withdraw the excess amount.

Tax benefits of a Tax-Free Savings Account

The biggest advantage of a TFSA is that any earnings on your funds, including interest, capital gains, dividends, and more, are tax-free. However, your contributions to a TFSA are not tax-deductible. 

Since you’ve already paid tax on the funds you invest in your Tax-Free Savings Account, any withdrawals you make from the account—regardless of when you make them—do not count toward your taxable income and are not taxed. 

How to open a TFSA in Canada

You can open a Tax-Free Savings Account with a financial institution, such as a bank or credit union. You’ll have to provide your SIN and other supporting documents to prove your eligibility to the TFSA issuer before they can open your account. You can book an appointment with an RBC Newcomer Advisor to learn more about TFSAs and the account opening process.

You can have more than one TFSA, with one or more issuers. However, your contribution room does not vary based on the number of TFSAs you have, and your total contributions must not exceed your annual contribution limit.

What types of investments can be made within a TFSA?

You can use your Tax-Free Savings Account to hold several different types of investments, including cash, shares or securities listed on a stock exchange, mutual funds, Guaranteed Investment Certificates (GICs), and bonds.

In some cases, the investments allowed in your TFSA may vary based on the issuing financial institution.

Withdrawing funds from your TFSA

Tax-Free Savings Accounts don’t have any lock-in period and you can withdraw funds from your TFSA at any time. Withdrawals, whether partial or full, are tax-free and those funds do not have to be added to your taxable income for the year.

As a newcomer, you may wish to make withdrawals from your TFSA for the occasional large expense, such as a down payment on a car or furniture for your home. When you withdraw from your TFSA, that amount will be added to your TFSA contribution room at the beginning of the next year. However, re-contributing in the same calendar year if you don’t have any leftover room can result in an over-contribution penalty.

For instance, if you withdrew $4,000 from your TFSA in 2022, your contribution room for 2023 will be $6,500 + $4,000 + any leftover contribution room from 2022.

What happens to your TFSA if you leave Canada permanently?

Even though most permanent residents move to Canada intending to settle here, sometimes circumstances change and your goals might shift. Rest assured that if you have to leave Canada permanently and become a non-resident, you can still keep your TFSA.

However, as a non-resident of Canada, here are some considerations to keep in mind regarding your TFSA account:

  • Although earnings or withdrawals from your TFSA account won’t be taxed in Canada, they may be taxable in your home country.
  • You can contribute to your TFSA up to the date on which you become a non-resident of Canada. You can use the full TFSA dollar limit for the year in which you emigrate.
  • TFSA contribution room will not accrue for any year in which you’re a non-resident of Canada (that is, any year in which you’re physically present in Canada for less than 183 days and do not have any residential ties to the country.)
  • If you make a withdrawal from your TFSA as a non-resident, the withdrawn amount will be added back to your contribution room, but will only be available after you regain your tax residency status in Canada.
  • Contributions made to your TFSA as a non-resident are subject to a one per cent tax for each month the funds stay in your account.

TFSA vs RRSP: Which is better?

One question newcomers to Canada often ask is whether a Tax-Free Savings Account is better than a Registered Retirement Savings Plan (RRSP). In reality, there are many differences between a TFSA and RRSP and both registered accounts have their advantages. Although it is possible to contribute to both these accounts, if you must pick one of the two, be sure to keep in mind your financial goals for your future in Canada.

When can newcomers start contributing? The year you arrive in Canada, provided you are over 18 years and have a SIN. The year after you arrive in Canada; After you’ve filed your first income tax return in Canada.
Are contributions taxable? Yes. You contribute to TFSA using after-tax income or savings. Contributions can be deducted from your taxable income for the following year. Contributions are tax-deferred and are taxed upon withdrawal.
Are earnings taxable? No. Yes, at the time of withdrawal.
Contribution limits for 2023 $6,500 (plus unused contribution room from previous years, if any). 18 per cent of your last year’s gross income, up to a maximum of $30,780 (plus unused limit from previous years).
Withdrawing funds You can withdraw funds at any time for any purpose without paying any tax or penalty. Withdrawals are taxable (except for Home Buyer’s Plan and Lifelong Learning Plan).

Should newcomers open a TFSA account in Canada?

As a newcomer, your long-term financial success in Canada will depend on how well you manage your savings and investments. The TFSA is a registered account that encourages Canadian residents to save for the future by offering them tax benefits on earnings that accrue on their contributions.

Another reason why the Tax-Free Savings Account is popular among newcomers is that it doesn’t have a lock-in period, and you can withdraw your funds whenever the need arises, without paying any extra tax.

Unlike the Registered Retirement Savings Plan (RRSP), which can only be opened after you’ve filed a tax return in Canada, newcomers can open a TFSA soon after arriving in Canada and start contributing immediately. Many newcomers invest savings from their home country into their TFSA to get a head start on their savings goals.