February 2023 Newsletter

As is well known, the Tax-Free Savings Account (TFSA) rules allow you to invest a substantial amount of money in a TFSA, and all interest, dividends and capital gains earned in the account are tax-free.

For 2023, another $6,500 is added to the amount you can contribute.

The age of eligibility for the TFSA is 18. It started in 2009 (with $5,000 being the maximum contribution that year and now it is $6,500). The cumulative contribution is $88,000 in 2023 for people who were at least 18 in 2009.

You can withdraw funds from a TFSA at any time with no tax cost, and the amount you withdraw becomes available to recontribute, but only from the following January 1. If you recontribute too soon, a penalty tax applies.

Do not swap securities in or out of your TFSA, i.e., in exchange for money or securities in other investment accounts. Severe penalties apply to a “swap transaction”.

Do not do too much active trading in your TFSA. If you buy and sell securities regularly, the TFSA may be considered to be “carrying on business”, and then it loses its tax exemption and you will have to pay tax, as a trust, at the highest tax rate that applies to individuals (something in the 50% range, depending on your province of residence). Also, you will be personally liable for that tax, so the CRA can assess you to collect it if the TFSA doesn’t have sufficient assets to pay.

The line between owning stocks as capital investments and holding them for trading as a business is not always clear. At one extreme, if you buy or sell a stock once a month there should be no problem. At the other extreme, if you are trading almost every day and holding stocks for only a few days at a time, that will be considered carrying on business and the TFSA will be taxed.

So be careful about this!

Last modified on February 8, 2023 12:00 am
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