The COVID-19 pandemic shook Canada’s economic, political, and social foundations since its seriousness became apparent in the late winter of 2020. Governments around the world responded with tough restrictions, lockdowns, and history-making fiscal and monetary stimulus to prop up a stalled economy.
Canada had its struggles, but it is on a promising reopening track this summer after a difficult 16 months. Today, I want to discuss how savings habits shifted during the crisis. On top of this, we’ll look at one Tax-Free Savings Account (TFSA) mistake that Canadians must avoid going forward. Let’s dive in.
The COVID-19 pandemic dramatically changed Canadian spending habits
Canadian saving and spending habits were subject to criticism as we closed out the 2010s. Heading into 2020, policymakers were faced with high household debt and how to balance that with future monetary tightening. Those plans fell by the wayside when the pandemic started to rage across Canada. The Bank of Canada kept the benchmark rate at 0.25% in 2020 and suggested that rates could go further down.
The loose monetary policy appeared to fuel a red-hot housing market, but spending habits changed dramatically during the pandemic. Canadians were forced into their homes, and leisure activities were all but obliterated due to restrictions and lockdowns. In March 2021, the Bank of Canada revealed that Canadians, on average, spent roughly $4,000 less in 2020 during the pandemic.
Did increased savings rates lead to all Canadians taking a second look at their TFSA, RRSP, or other investments? In some cases, yes. However, this environment also led Canadians to make some crucial errors.
Here’s why you need to avoid this big TFSA mistake
In early January, I’d gone over some top TFSA tips for Canadians to remember for the coming year. I’d suggested that Canadians watch out when it came to over contributions. TFSA rules can be confusing in this area.
Canadians need to remember that TFSA contributions enjoy something of a reset in the new year. For example, let’s say you maxed out your TFSA room in February with a $75,500 deposit. In March, you wanted to buy a new car and withdrew $8,000. You can’t make up for that withdrawal with a contribution until January 1, 2022. If you do, it counts as an over-contribution and you risk paying a penalty.
Fortunately, the Canada Revenue Agency (CRA) does offer some leeway for mistakes. However, this is entirely at their discretion and is deal with on a case-by-case basis.
Don’t be shy with your TFSA in 2021!
The first tip in my TFSA tip article involved the use of cash in the account. Unfortunately, the savings windfall for many Canadians has not gone to use in 2021. Recent data from top financial institutions suggest that TFSAs are still often being used as simple cash accounts. Investors should be using the TFSA to its fullest potential.
Consider a stock like Canada Goose (TSX:GOOS)(NYSE:GOOS), which launched its Initial Public Offering (IPO) in March 2017. The famed winter clothing manufacturer and retailer saw its stock sink to a 52-week low of $29.00 per share in the thick of the pandemic in 2020.
A $4,000 investment in Canada Goose stock in your TFSA would be worth just over $7,000 at the time of this writing. That is $3,000 in tax-free gains. Canadian stocks have roared since the March 2020 market pullback, and Canadians who use their TFSAs as cash accounts are missing out on the bull market.