I’ve seen some recent discussions on financial social media suggesting that Canada should rename the Tax-Free Savings Account (TFSA) to the Tax-Free Investment Account (TFIA). Personally, I agree.
The problem with calling it a savings account is that it encourages people to treat it like a place to park cash. There’s nothing inherently wrong with saving money, and everyone should have an emergency fund. But when you’re working with limited tax-free contribution room, I think there’s a much better use for it.
Remember, the TFSA allows investments to compound without Canadian taxes on dividends, interest, or capital gains. You can also withdraw money whenever you want without paying Canadian income tax, and whatever you withdraw gets added back to your contribution room the following calendar year.
Those are valuable privileges. Using them solely to shelter the modest interest earned on cash or Guaranteed Investment Certificates (GICs) seems like a missed opportunity. The biggest reason is inflation, which quietly erodes the purchasing power of your savings over time.
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Inflation is a bigger problem than you think
One mistake I see investors make is looking at the annual inflation rate without considering its cumulative effects. For example, a 2% annual inflation rate might not sound particularly concerning. But inflation compounds just like investment returns, except it works against your purchasing power.
After 20 years of 2% annual inflation, something that originally cost $100 would cost approximately $149. That’s a nearly 49% increase in prices, even though inflation never exceeded 2% annually. And Canada’s actual experience has been considerably more volatile, particularly following the pandemic.
For a real-world example, consider the period since 2000. Based on Canadian consumer price index data, something that cost $100 back then would cost approximately $173 today. That’s a cumulative increase of roughly 73%, despite annual inflation averaging only about 2.1%. Put another way, if you had simply kept that $100 in cash for the entire period without earning interest, it would now have less than 60% of its original purchasing power.
That’s why I don’t consider cash a risk-free investment over long periods. Your account balance might remain stable, but the amount of goods and services it can purchase steadily declines. Over long periods, I think stocks, despite their volatility, offer one of the best ways to protect against inflation.
Why I’d rather own stocks in my TFSA
When you own shares, you own a piece of an actual business. Companies can often raise prices as their input costs increase, grow their revenues, reinvest profits, and expand their operations. Those with strong competitive advantages may be particularly well positioned to preserve profitability during inflationary periods.
Of course, stocks aren’t guaranteed to outperform inflation every year. Higher interest rates, weaker consumer demand, and rising costs can hurt earnings and share prices. But over several decades, owning productive businesses gives investors a much better opportunity to grow their purchasing power than leaving everything in cash.
The TFSA makes that strategy even more attractive because dividends and capital gains can compound without Canadian taxes eating into your returns. Contribution room is limited, though. For 2026, Canadians receive another $7,000 in annual TFSA contribution room.
That’s why I would prioritize long-term investments with meaningful growth potential. One option I particularly like is the iShares Core Equity ETF Portfolio (TSX: XEQT).
XEQT is an all-in-one asset allocation exchange-traded fund (ETF) holding thousands of stocks across Canada, the United States, international developed markets, and emerging markets. It maintains a 100% equity allocation, automatically rebalances its underlying holdings, and charges a relatively low management expense ratio of 0.19%.
For younger investors with decades ahead of them and the risk tolerance to withstand stock market downturns, I think XEQT is an excellent example of how a TFSA should be used. Keep contributing, reinvest the distributions, and let those businesses compound over time. You can eventually withdraw the proceeds without paying Canadian income tax.
