The Tax-Free Savings Account (TFSA) is one of the best investment environments available in Canada. Offering tax-free dividends and capital gains as well as tax-free withdrawals, the TFSA can really help you grow your wealth.
The benefits of tax-free dividends and gains are similar to those offered by Registered Retirement Savings Plans (tax-free compounding and higher after-tax returns), but TFSAs also give you the freedom to withdraw money without a tax penalty. These combined benefits make the TFSA ideally suited to relatively long-term investments that you aren’t fully committed to holding until retirement.
A big question that many Canadians ask about TFSAs is how much they can invest in them. The absolute maximum limit on a new account is $95,000; however, your individual circumstances determine whether you personally can contribute that much. In this article, I will explore the question of whether you can really contribute and invest $95,000 into a new TFSA.
It all depends on age and past contributions
Whether or not you can invest $95,000 into a new TFSA depends on A) your age and B) your past contributions.
Your TFSA contribution room is the room you’ve accumulated in all the years you’ve been eligible to open a TFSA. You don’t need to have already opened TFSA to accumulate contribution room, you’ll have all the room that a person your age is entitled to when you open your first one. There’s a set amount of TFSA room added each year — it’s the same for everyone — and you are entitled to all the room that has accumulated since you turned 18.
As for the $95,000 number specifically, you need to have turned 18 at some point in 1991 or earlier to have that amount. Otherwise you can find your personal amount of accumulated contribution room by signing in to CRA MyAccount.
How to get the most of your TFSA
Once you have a TFSA with a decent amount of money in it, the next thing to do is invest. Generally speaking, it’s better to hold stocks that pay dividends rather than those that don’t pay dividends in a TFSA because stocks without dividends aren’t taxed as frequently as dividend stocks. So, the tax-sheltering is more impactful in the latter case (unless you’re a short-term trader).
Alimentation Couche-Tard (TSX:ATD) is a good example. ATD is a dividend stock with a 0.9% yield. You might argue that the low yield is less than ideal to illustrate the point I’m trying to make here, but ATD is worth mentioning because of its overall quality.
With $95,000 fully invested in ATD in a taxable account, you’d get $867 per year in dividend income. The math on that is shown below.
| COMPANY | RECENT PRICE | NUMBER OF SHARES | DIVIDEND | TOTAL PAYOUT | FREQUENCY |
| Alimentation Couche-Tard | $76.67 | 1,240 | $0.175 per quarter ($0.70 per year) | $217 per quarter ($868 per year) | Quarterly |
Now, if you had a 50% marginal tax rate in Ontario, you’d pay $299 in taxes on the dividends received from those shares. The math on that is as follows:
- Taxable amount with 38% gross-up: $1,198
- 50% pre-credit tax: $599
- 15% Federal dividend tax credit: $180
- 10% Provincial dividend tax credit: $120
- Taxes payable: $299
So, you’d pay $299 on your ATD dividends in a taxable account — assuming you lived in Ontario and had a 50% marginal rate, that is.
Regardless of what your tax rate or province was, you’d pay $0 on your ATD dividends in a TFSA. So, the TFSA beats even the mighty dividend tax credit when it comes to saving you money. Just contribute within your limit and avoid professional day trading, and the tax savings will be yours!
