The 2025 Tax-Free Savings Account (TFSA) contribution room is here, and it’s $7,000. Unless you’re a very high earner needing to prioritize your Registered Retirement Savings Plan (RRSP) for tax deferrals or saving for a first home using a First Home Savings Account, making the most of your TFSA should be high on your list of priorities.
That said, it’s important to be strategic about how you invest this contribution. The TFSA offers plenty of advantages, but it’s not without limitations. Here are two important factors you may not have considered, along with tips to help you navigate them effectively.
Be smart about holding U.S. stocks
Suppose you decide to invest in U.S. stocks through your TFSA and settle on Vanguard Total Stock Market ETF (NYSEMKT:VTI).
You go through the hassle of converting your Canadian dollars to U.S. dollars at today’s high exchange rates, potentially paying a hefty brokerage commission in the process.
Then, come dividend time, you’re shocked to find that 15% of your quarterly payment has been withheld. What gives? Isn’t this a tax-free account?
Yes, with one exception—the IRS levies a 15% foreign withholding tax on dividends from U.S. exchange-traded funds (ETFs) and stocks, even within a TFSA. Unfortunately, the U.S. doesn’t recognize the TFSA as a retirement account like it does an RRSP, where this withholding tax can be avoided.
To bypass this issue, simply stick with Vanguard U.S. Total Stock Market Index ETF (TSX:VUN).
It’s the Canadian-dollar equivalent of VTI, so you’re still getting the same exposure to the U.S. market. If you’re going to lose 15% of your dividends, you might as well not lose even more on fees.
Don’t take excessive risk
The tax-free nature of a TFSA is a double-edged sword—it might not seem like it at first, but hear me out.
In a non-registered account, if you sell an investment above its cost basis, you incur a capital gain, which is taxable at a 50% inclusion rate.
Conversely, if you sell an investment below its cost basis, there’s a silver lining—you can use that capital loss to offset gains elsewhere.
However, in a TFSA, none of that applies. What id you sell something at a higher price? Congratulations on your tax-free gains. But what if you sell something at a loss? Sorry, that loss can’t be claimed. It’s gone forever, along with your contribution room.
That’s why I strongly suggest avoiding speculative plays in your TFSA. Meme stocks, penny stocks, options trading—leave those for accounts where losses can at least offer a tax benefit.
Be smart about how you use your limited contribution room, focusing on stable, broadly diversified ETFs or high-quality blue-chip stocks instead.
