Do you want to make the most of your TFSA contribution room in 2025?
If so, you have an excellent opportunity to do so, as you’ll be getting $7,000 worth of new contribution room next year. That’s $7,000 worth of account space in which to invest tax-free, in addition to whatever free space you have now.
Of course, just putting money into a TFSA doesn’t do a whole lot on its own. In order to make the most of a TFSA, you need to invest the money within it. In this article, I will explore a simple three-step process for making the most of your TFSA room in 2025.
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Step #1: Create a short list of investments
Since TFSA room is useless without gains to shelter from taxation, you need a game plan for investing the money you deposit in your TFSA. A good idea is to start with a short list of potential investments that seem enticing to you. These could be index funds, stocks, bonds, guaranteed investment certificates (GICs), or anything else that can be invested in a TFSA.
It’s important to note that you can’t deposit shares in a company you control in a TFSA. If you have a small business that has been securitized and has shares, and you deposit them into your TFSA, the CRA will still tax you. The reason is that your small business shares are considered to be your source of business income, not an investment. So, make sure to stick to well-known listed assets when investing in a TFSA.
Step #2: Identify the ones that most need tax sheltering
Once you have a short list of assets to invest in, you should identify the ones that most need tax sheltering. Investments vary significantly in terms of how much they are taxed. Generally speaking, bonds are taxed the most (they are taxed like regular income), dividend stocks are taxed the second most, and non-dividend stocks are taxed the least. It follows from this that bonds are most in need of tax sheltering, dividend stocks the second most, and non-dividend stocks the least.
Stocks that don’t pay many dividends don’t need to be sheltered much, especially if you plan on holding them for long periods of time. Consider Alimentation Couche-Tard Inc (TSX:ATD) for example. It’s a Canadian convenience store company that sells road transportation fuel as well as various snacks and vice products. It is a very well-run company that tends to invest most of its profit back into itself.
Because it invests most of its earnings back into itself, ATD has a modest amount of debt, despite having expanded considerably over the last 20 years. As a result of this, ATD has a very low 0.97% dividend yield. Because it has a low yield and is a stable company that you won’t have to sell if you don’t want to, ATD might take a back seat to bonds or high-yield stocks for your TFSA portfolio. It doesn’t need the tax sheltering as much as those assets do.
Step #3: Monitor and rebalance
The last step in making the most of your TFSA room is to monitor and rebalance. This means watch how your stocks are doing, sell a bit of what’s running hot, and put a bit extra into what’s underperforming. This prevents your account from getting too heavily weighted in one asset category. It also helps keep things interesting.
