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Last updated: May 16 2017
Use your tax refund for your TFSA
What are you doing with your tax refund this year? If it hasn’t yet been spent, one of the most tax-efficient things you can do is to invest it in your TFSA. It’s a short-term plan with a long-term vision: this investment will help to guarantee your tax-efficient retirement.
Unlike the RRSP rules, contributions to a TSFA do not result in an income tax deduction and withdrawals from a TFSA are not reported as income. Nor are they included in income for any income-tested benefits, such as the Canada Child Tax Benefit or Goods and Services Tax Credit.
Back in 2009, when TFSAs were first introduced, taxpayers over the age of 17 and who are residents of Canada could contribute up to $5,000 each year. (Contribution room in the TFSA does not depend on “earned income,” as does RRSP contribution room, but was set at a flat $5,000 per year, indexed to inflation and rounded to the nearest $500 to increase in increments of $500 as required.) Contribution room that is not used in a particular year may be carried forward to the next year, allowing for a larger contribution in that year and future years. There is no limit to how much contribution room you can accumulate using this carry-forward provision.
In 2013, the contribution room was increased through indexing from $5,000 to $5,500. This amount also applied to 2014. For 2015, the contribution limit was set to $10,000, (it was not to be indexed after this). This increase indeed maximized the inflation protection for investors as shown below. However, for 2016 and subsequent years, the contribution limit was set back to $5,500 (with ongoing indexation).
The chart below summarizes the indexing factors and resulting contribution limits:
|
Year |
Indexing Factor |
Indexed Amount |
Actual Limit |
Cumulative Limit |
|
2009 |
|
$5,000 |
$ 5,000 |
$5,000 |
|
2010 |
1.006 |
$5,030 |
$ 5,000 |
$10,000 |
|
2011 |
1.014 |
$5,100 |
$ 5,000 |
$15,000 |
|
2012 |
1.028 |
$5,243 |
$ 5,000 |
$20,000 |
|
2013 |
1.020 |
$5,348 |
$ 5,500 |
$25,500 |
|
2014 |
1.009 |
$5,396 |
$ 5,500 |
$31,000 |
|
2015 |
1.017 |
$5,488 |
$10,000 |
$41,000 |
|
2016 |
1.013 |
$5,559 |
$ 5,500 |
$46,500 |
|
2017 |
1.014 |
$5,637 |
$ 5,500 |
$52,000 |
|
|
Indexed Maximum |
$47,801 |
|
|
|
2018 |
|
|
$ 5,500 |
$57,500 |
|
2019 |
Estimated |
|
$ 6,000 |
$63,500 |
Source: EverGreen Explanatory Notes from Knowledge Bureau
The $5,500 contribution limit will increase to $6,000 when the indexed amount exceeds $5,750. This is not likely to occur until 2019.
As you can see by the chart, significant TFSA savings room is available to eligible Canadians. And remember, those savings are protected from inflation erosion. Therefore, the best way to bolster your savings power is to use your maximum TFSA contribution room as soon as you possibly can.
The funds in your TFSA can keep up with inflation so long as the rate of return exceeds the rate of inflation. Within an RRSP, on the other hand, higher returns are required to keep up with inflation because, when the funds are withdrawn, income tax will have to be paid thus reducing the effective rate of return. Therefore, in times of low investment returns, RRSP accumulations may lose ground to inflation while TFSA accumulations will not.
Evelyn Jacks is President of Knowledge Bureau, Canada’s leading educator in the tax and financial services, and author of 52 books on family tax preparation and planning.
©2017 Knowledge Bureau Inc. All Rights Reserved.
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