TFSA: Your Complete Guide to the $7,000 Contribution Room in 2025

Give this a read before investing in your TFSA for 2025.

| More on:
Blocks conceptualizing Canada's Tax Free Savings Account

Source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The Tax-Free Savings Account (TFSA) is a unique investment vehicle available to Canadians that allows you to grow your wealth without worrying about taxes.

You can hold a wide variety of investments inside a TFSA, including stocks, funds, bonds, and GICs. Any earnings – whether from interest, dividends, or capital gains – are completely tax-free, and the best part is that withdrawals are also tax-free.

Unlike other registered accounts, there are no restrictions on when or how much you can withdraw, making it an incredibly flexible tool for both short- and long-term goals.

Now, there’s no shortage of articles urging you to invest your new $7,000 TFSA contribution for 2025 – but before diving in, there’s a smarter way to approach it.

For all the perks a TFSA offers, it also comes with some hidden nuances that, if understood, can significantly improve your investment outcomes.

No gimmicks or hacks – just practical insights that may have flown under your radar. Here’s what you need to know before putting that contribution to work.

There’s a 15% withholding tax on U.S. dividends

There’s one small asterisk to the TFSA’s “tax-free status,” and it comes courtesy of Uncle Sam and the IRS.

Suppose you deposit $7,000 into your TFSA, convert it to USD (ouch at today’s exchange rates), and buy the Vanguard S&P 500 ETF (NYSEMKT:VOO).

Created with Highcharts 11.4.3Vanguard S&P 500 ETF PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.ca

What you might not know is that you’ll lose 15% of every quarterly dividend VOO pays to you. This is called foreign withholding tax.

Normally, the U.S. imposes a 30% tax on dividends paid by its companies and ETFs to international investors. Thanks to a tax treaty, this rate is reduced to 15% for Canadians.

However, the TFSA isn’t recognized by the U.S. government as a retirement account, so this 15% withholding tax still applies. The only way to avoid it? Hold U.S. stocks and ETFs in your RRSP, which the U.S. does recognize as tax-exempt for dividends.

You can’t claim any capital losses

Suppose you invested in meme stock AMC Entertainment (NYSE:AMC) after falling for the “to the moon” and short squeeze promises made by “ape” investors on Reddit and Twitter.

Created with Highcharts 11.4.3AMC Entertainment PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.ca

Now, you’re likely stuck holding a heavy bag. If this happened in a non-registered account, there’s at least a silver lining – you can use the capital loss to offset capital gains and reduce your tax bill.

But if you incurred this loss in a TFSA, you’re out of luck. You can’t claim a capital loss inside a TFSA. The tax-free nature of the account works both ways –whether you win or lose. Worse, the contribution room you used for that investment is gone forever.

So, be smart with your limited TFSA room. Avoid speculative meme stocks like AMC, penny stocks, or options trading. Instead, stick to broadly diversified ETFs and high-quality blue-chip stocks for steady, reliable growth.

Should you invest $1,000 in Amc Entertainment right now?

Before you buy stock in Amc Entertainment, consider this:

The Motley Fool Stock Advisor Canada analyst team just identified what they believe are the Top Stocks for 2025 and Beyond for investors to buy now… and Amc Entertainment wasn’t one of them. The Top Stocks that made the cut could potentially produce monster returns in the coming years.

Consider MercadoLibre, which we first recommended on January 8, 2014 ... if you invested $1,000 in the “eBay of Latin America” at the time of our recommendation, you’d have $20,697.16!*

Stock Advisor Canada provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month – one from Canada and one from the U.S. The Stock Advisor Canada service has outperformed the return of S&P/TSX Composite Index by 29 percentage points since 2013*.

See the Top Stocks * Returns as of 3/20/25

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Tony Dong has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Confidently Navigate Market Volatility: Claim Your Free Report!

Feeling uneasy about the ups and downs of the stock market lately? You’re not alone. At The Motley Fool Canada, we get it — and we’re here to help. We’ve crafted an essential guide designed to help you through these uncertain times: "5-Step Checklist: How to Prepare Your Portfolio for Volatility."

Don't miss out on this opportunity for peace of mind. Just click below to learn how to receive your complimentary report today!

Get Our Free Report Today

More on Stocks for Beginners

Stocks for Beginners

Dip Buyers Could Win Big: The Best Canadian Stocks to Buy Now

These two growth stocks have taken hits recently, but their fundamentals remain strong, and their growth prospects are intact.

Read more »

An investor uses a tablet
Stocks for Beginners

The Smartest Canadian Stock to Buy With $250 Right Now

Are you looking for the smartest Canadian stock to buy right now? Consider this gem and avoid market volatility.

Read more »

A train passes Morant's curve in Banff National Park in the Canadian Rockies.
Dividend Stocks

1 Practically Perfect Canadian Stock Down 24% to Buy Now and Hold for Life!

CNR stock is a top Canadian stock for investors, especially with shares down on the TSX today.

Read more »

Canada national flag waving in wind on clear day
Dividend Stocks

The Best Canadian Stocks to Buy Right Away With $30,000

If you have $30,000 you're willing to invest, these are some of the first Canadian stocks to consider on your…

Read more »

rail train
Dividend Stocks

What to Know About Canadian Pacific Railway Stock for 2025

CP stock has now gone through a major merger, so what do investors have to look forward to?

Read more »

Paper Canadian currency of various denominations
Stocks for Beginners

2 Canadian Value Stocks for 2025

There's a fair bit to consider when looking at value stocks, so let's look at two that fit the bill.

Read more »

data analyze research
Stocks for Beginners

Smart Money’s Playbook for the Current Market Dip

This market dip might be worrying investors, so don't worry with these two stocks.

Read more »

Canada day banner background design of flag
Tech Stocks

The Top Canadian Stock to Buy With $5,000 in 2025

There are few Canadian stocks out there that offer the outlook of this tech stock, bound for more growth.

Read more »