The Tax Free Savings Account (TFSA) was introduced in 2009. After 11 years of steady contributions, these accounts have become very meaningful. Many Canadians have fully embraced the benefits that come from tax efficient investment income and growth within these accounts.
Annually, the Department of Finance releases the indexation adjustments for personal income tax and benefit amounts. The indexation rate is effectively the Consumer Price Index reported by Statistics Canada. Most personal income tax and benefit amounts are indexed to inflation annually.
What makes the TFSA different is that adjustments are only done to the nearest $500 increment. As a result, several years can go by with no changes to the annual limit. For calculation purposes, the annual TFSA dollar limit was fixed at $5,000 (initial level) and indexed to inflation for each year after 2009. The one exception to this was a one-time large increase in 2015.
The indexation increase is only 1.0 per cent for 2021. This is the lowest indexation since the TFSA began. For comparison, the indexation increases in the previous five years were 2.2 percent (2020), 1.5 per cent (2019), 1.5 per cent (2018), 1.4 per cent (2017), and 1.3 per cent (2016).
The following are the annual and cumulative TFSA limits:
|Year||Annual limit||Cumulative limit|
If you have never contributed to a TFSA, then the cumulative limit is an important number to look at. If you were 18 years or older in the year 2009 then you may contribute $75,500 to a TFSA if you have never contributed to one before and never resided outside of Canada.
In many cases, people have put some funds in their TFSA but have not maximized contributions. In other cases, people have pulled funds out of their TFSA, in which case they’re able to replenish this room in the next calendar year.
When it comes to TFSA contributions, there is an additional consideration to be made for married and common-law couples. The Canada Revenue Agency (CRA) will allow a spouse to give their partner money to contribute to their TFSA.
Unlike an RRSP, by one spouse giving the other spouse funds to contribute, it does not affect the TFSA contribution room of the spouse gifting the funds. We recommend spouses, especially when in different tax brackets, take advantage of this annually as it helps shift tax-generating assets from the higher income spouse into a tax-free investment vehicle.
Before you contribute, it is important to know your contribution room. When the TFSA first came out, your annual contribution room was noted on your notice of assessment. This information has since been eliminated on the assessments.
The best way today to obtain your contribution room is to log into “My Account” through the Canada Revenue Agency website. This will enable you to obtain both your TFSA contribution room and transaction summary (a record of all your past contributions and withdrawals).
It is always best to check your limit before contributing. Although you may have more than one TFSA at multiple financial institutions, we recommend having only one to ensure no over-contributions are done. Over-contributions are subject to a penalty of one per cent per month on the excess.
In addition to knowing what dollar amount to contribute to your TFSA, we also encourage you to know all your investment options. The choice of investment options should reflect your investment objectives, risk tolerance, and time horizon. Once these have been determined, contributing early is advisable.
Next week we will illustrate the benefit of contributing early in the year to your TFSA.
Kevin Greenard CPA CA FMA CFP CIM is a Portfolio Manager and Director, Wealth Management with The Greenard Group at Scotia Wealth Management in Victoria. His column appears every week in at timescolonist.com. Call 250-389-2138, email firstname.lastname@example.org, or visit greenardgroup.com.