Can Canadian residents invest tax-free?

Highlights: How can Canadian residents invest without tax?

• Canadian residents can open a Tax-Free Savings Account to invest in Canada without tax.
• A TFSA allows investors to grow their wealth without paying income taxes.
• Canadian residents aged above 18 years and who have a valid SIN are eligible to open TFSA.
• The annual contribution limit for TFSA is CAD 7,000 as of 2024.

 

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Tax-Free Investment in Canada

Canadian newcomers willing to invest in the country can open a Tax-Free Saving Account to invest without paying income taxes. TFSA holders can invest their money without paying tax on their investment income.

 

Contributions to the TFSA in Canada are made with non-tax-deductible dollars and income within the account, earnings on investments and withdrawals are free of tax deductions.

 

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Why open a TFSA?

TFSA holders can significantly bring down their income taxes payable over their lifetime. If you contribute CAD 7000 to your TFSA in 2024 and continue to deposit the same amount from 2024 to 2065, then you can earn an average annual compounded return of 6%. Your investment returns would be around CAD 868,333.78. If your marginal income tax rate is 30%, then you would save around CAD 260,500 on income tax.

 

Who can contribute to TFSA?

You would be eligible to contribute to a TFSA if you are a resident of Canada above 18 years old and have a valid Social Insurance Number. Temporary residents, Canada work permit holders, Canadian study permit holders, Canada PR holders, or Canadian citizens can open a TFSA account. The only requirement is that you be a legal resident of Canada, and you should be considered for income tax purposes.

 

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How much can you contribute to a TFSA?

Canadian residents aged above 18 can accumulate their contributions in a contribution room. The annual contribution limit for 2024 is set at CAD 2000. The limit began at CAD 5000 in 2009, increased with inflation, and is rounded to the nearest CAD 500.

 

Your funds can be withdrawn from your TFSA anytime and no taxes will be charged on withdrawals. The withdrawal amount will be added to your contribution for the upcoming year.

 

How to keep track of your contribution room?

Exceeding your contribution limit may lead to a steep penalty amount being charged to the account holder. The Canada Revenue Agency (CRA) charges a 1% tax rate per month on extra contributions until you withdraw all excess contributions. For instance, if a person is 18 years old in 2024 and contribute CAD 8000 to their TFSA, then the exceeded amount of CAD 1000 will go to his contribution room for next year.

 

You can track your TFSA contribution limits on your CRA My Account. However, you must keep your own records to make sure that you are contributing without exceeding limits.

 

What investments can be held in a TFSA?

TFSA works better for long-term investments such as mutual funds, stocks, exchange traded funds, guaranteed investment certificated (GICs) or bonds. Higher-yielding investments can provide more significant benefits from the TFSA.

 

What happens if the holder becomes a non-resident of Canada?

Your TFSA can be kept and no taxes will be charged on your invest income or withdrawals even if you become a non-resident of Canada. However, in such cases you will not be able to contribute for the years while you were away from Canada. Withdrawals made as a non-resident of Canada will still be added to your contribution room, but the contribution room can only be used after you re-establish your residency in Canada.

 

Note: Contributions made as a non-resident Canadian are subject to a 1% tax deduction per month.

 

Where can you open a TFSA?

Eligible candidates can open a TFSA in any financial institution in Canada providing investment accounts.

 

What happens if the holder dies?

Spouses or common-law partners can inherit TFSA as a successor. The rule of tax-free investment will be relevant for successor TFSA holders as well.

 

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