Planning Ahead: Optimizing TFSA Contribution Room for 2025

As another year draws to a close, it’s a good time to review your investment strategy and ensure you’re maximizing your opportunities for growth and optimizing your wealth-building techniques so as to reach your financial objectives within the shortest time possible. One of the most powerful tools available to Canadian investors since 2009 is the Tax-Free Savings Account (TFSA). This financial planning tool could be optimized for maximum impact in your investing journey. Let’s explore how you can optimize your TFSA contribution room for the coming year and beyond.

Understanding your TFSA plan for 2025

A TFSA is a registered investment account that allows your investments to grow tax-free. You won’t pay any taxes on the investment income you earn or on any capital gains on holdings located within the account. However, unlike Registered Retirement Savings Plans (RRSPs), contributions to a TFSA are not tax-deductible, but withdrawals are tax-free and don’t affect government benefits earned in retirement.  

Maximizing your 2025 contributions

The Canada Revenue Agency (CRA) has confirmed the TFSA contribution limit for 2025 is $7,000, the same as for 2024. However, the real power of the TFSA lies in its cumulative nature. If you haven’t used your full contribution room in previous years, you can carry forward those unused amounts.  

For anyone who has been eligible to contribute to a TFSA since its inception in 2009 (meaning they were 18 or older at that time), the cumulative contribution room by the end of 2025 will be $102,000. This is a significant amount that can be used to build a substantial investment portfolio.

Strategies for contributing to a TFSA

You could make a lump-sum contribution, contribute smaller amounts regularly to the TFSA throughout the year, or even set up automatic transfers. Contributing smaller amounts regularly, for example, $580 per month, could be known as dollar-cost averaging. This strategy helps to average out the purchase price of your investments over time, reducing the impact of market volatility.  

Choosing the right investments within your TFSA for 2025

To fully optimize the tax benefits of a TFSA, it’s essential to choose the best types of investments (from your personally suitable menu). Since all investment growth, including income receipts, within a TFSA is tax-free, it makes sense to hold investments that would typically be taxed at a higher rate outside of a TFSA.

• Real estate investment trusts (REITs): REITs are companies that own and operate income-producing real estate. They distribute a significant portion of their income to unitholders as distributions (usually paid monthly). These distributions are typically taxed as regular income outside of a TFSA. Holding REITs within your TFSA shelters this income from taxation.  
• Dividend-paying stocks: Dividends received from Canadian corporations are taxed at a lower rate than regular income outside of a TFSA due to the dividend tax credit. However, holding these within a TFSA eliminates any tax payable on dividends.  
• High-growth stocks: Stocks of companies with high growth potential can generate significant capital gains. These outsized gains are tax-free within a TFSA but would attract “painfully outsized” capital gains taxes if located in any other investment account type.  

Investing in REITs within a TFSA: The case for CT Real Estate Investment Trust

Consider making $580 monthly investments in CT Real Estate Investment Trust (TSX:CRT.UN), a high-quality retail property owner with an 11-year track record of consistent distribution increases. The REIT touts a rich and juicy 6.2% distribution yield, and its payout is well-covered by recurring rental cash flows from a fully occupied property portfolio predominantly leased to Canadian Tire — a resilient retail giant with an investment-grade credit rating that’s unlikely to default on its rentals any time soon.

Investing $580 a month in CT REIT: The first contribution

After 12 months of consistent contributions of $580 each month in a TFSA, the total contribution would reach $6,960 for 2025, the position could generate $36.96 in tax-free monthly distributions by January 2026, and more than $440 in annual passive income thereafter.

Take note that actual results may vary materially as unit prices change and if the REIT substantially raises its distribution again in 2025