Leith Wheeler Explainer Series: TFSAs

Leith Wheeler Explainer Series: TFSAs

In managing portfolios for our clients, we can control a few levers to maximize the net returns they experience. We work hard to generate superior returns, of course, but additionally we trade carefully to minimize transaction costs; negotiate low custody fees for our funds; and charge fair fees of our clients for our services. On the question of tax, where we have discretion, we are mindful of managing taxable accounts carefully to avoid triggering capital gains taxes unnecessarily.

Aside from choosing their investment manager, what can investors themselves do?

Our clients in fact have the power to make a big impact on a portion of their net returns, just by taking advantage of a freebie from the federal government: maximizing contributions to their Tax-Free Savings Accounts (TFSA).

Including the $6,000 max confirmed by the feds for 2020, the maximum TFSA lifetime contribution through the year ended December 31, 2020 is $69,500 if, as of this past New Years Eve:

  • you were 29 years old or older; and
  • you’ve lived continuously in Canada since 2009 (with no absences of one year or longer).

There are conditions that would lower that lifetime (so far) maximum, which you can learn about here


What is the impact of the TFSA tax shield?

Here’s an example: If you opened your first TFSA account today, qualified for and contributed the $69,500 max, all future earnings on that amount could be withdrawn tax-free with no penalty. What does that mean? In round numbers, if you earned 5% per year for just over 14 years, you’d double your investment to $139,000. If you then withdrew all $139,000 at that point, none of the “extra” $69,500 would be subject to tax of any kind.

Compare that to the usual tax burden on investment returns, in which you would be subject to tax on the portion of the $69,500 growth represented by capital gains (in simple terms, the increase in the prices of the stocks you held). Also, over the course of those 14 years, you would have had to pay tax every year on any dividends or income received (or capital gain distributions on any mutual fund holdings). The net dollar impact would depend on the investor’s tax bracket, but it’s a safe bet that it’s higher than zero.

What happens if I want to take money out?

Unlike RRSP “room,” which disappears once you use it and is not restored if you make withdrawals from the account later*, TFSA “room” is flexible and permanent. Think of the two as being like a rose (RRSP) and a starfish (TFSA). Once you cut the bloom off of an RRSP contribution (withdraw it), that’s it. It’s gone. Conversely, though, you can cut the arm off a TFSA starfish, and it will grow back. You can ‘re-contribute’ the amount you withdrew in the next calendar year.


For this reason, TFSAs can be utilized for more than retirement planning, including shorter-term investment goals such as augmenting an RESP (another great tax-shielding account), saving for that boat or vacation home, or even relying on it as a short-term safety net.

If you are interested in learning more about how a TFSA might benefit you, reach out to your Leith Wheeler portfolio manager or contact us at 1.888.292.1122.


*Other than the two tax-free exemptions of the Home Buyers’ Plan and Lifelong Learning Plan