I have a tax-free savings account at CIBC and another at Bank of Nova Scotia. In 2024, I made a withdrawal from the TFSA at CIBC. Can I add this amount to my contribution room and use it for investment purposes at Scotia?
Yes. When you make a TFSA withdrawal, the amount is added to your TFSA contribution room on Jan. 1 of the year following the withdrawal. This additional contribution room is not tied to the account from which you made the withdrawal; you can use it to make a contribution to any TFSA account in your name.
For example, if you withdrew $5,000 from your CIBC TFSA in 2024, on Jan. 1 your total TFSA contribution limit would have increased by $5,000, plus the additional $7,000 of room available to all TFSA holders for 2025. If you had any unused contribution room from previous years, you would include it in your 2025 contribution limit as well.
How can I determine how much TFSA contribution room I have?
I strongly recommend that you keep accurate records of your TFSA contributions and withdrawals so that you will know exactly how much contribution room you have available.
If you have registered with the Canada Revenue Agency’s “My Account” service, you can check your TFSA contribution limit online at any time. But you need to be extremely careful with CRA’s TFSA figures, because they are often out of date.
For example, my CRA account shows that I have $14,000 of contribution room for 2025. But this figure doesn’t include the $7,000 TFSA contribution I made in early January of this year. Nor does it include the $7,000 contribution I made in January of 2024. That’s because financial institutions are not required to report the previous year’s TFSA transaction to the CRA until the last day of February each year. So my available TFSA contribution room is actually zero, not $14,000.
What happens if I overcontribute to my TFSA?
If you accidentally contribute too much to your TFSA – which can easily happen if you rely on the CRA’s data – you will face a penalty tax of 1 per cent per month on the excess amount until it’s removed. The best way to avoid overcontributions is to keep accurate records of your TFSA contributions and withdrawals.
I have read conflicting advice on what investments people should put into their TFSAs. Do you recommend stocks, bonds, cash, guaranteed investment certificates, or something else?
There is no one-size-fits-all solution, as everyone’s financial circumstances are different. But, basically, the idea is to choose investments that will save you the most tax by putting them into your TFSA. For example, a stock with a dividend yield of 5 per cent and expected capital growth of 3 per cent would be a good candidate for a TFSA as there would be no taxes on the income or capital gains. On the other hand, holding low-yielding cash in a TFSA would not be ideal, as the amount of tax you would save would be small, largely defeating the purpose of a TFSA. In my own TFSA, I have a mix of stocks, exchange-traded funds and a high-interest savings account (currently yielding 2.95 per cent) that I use to park my cash until I decide how to invest it.
If you’re investing in a high-risk stock – a tech startup, for example – wouldn’t it be better to keep it in a non-registered account instead of a TFSA? That way, if it doesn’t work out, you could claim the capital loss for tax purposes, which you can’t do in a TFSA.
You’re only focusing on one potential outcome. Sure, if the stock craters, you can use the capital loss in a non-registered account. But if the stock soars in value, you’ll face capital-gains taxes, which you would avoid in a TFSA. Presumably, you are investing with the intention of making money, not losing it. I would add that, if you are concerned about a potentially large loss, maybe it’s not the best stock to own, regardless of the account.
My daughter recently started her first full-time job after university and will have some cash to invest. Which do you recommend opening first – a TFSA or registered retirement savings plan?
Your daughter should open both at the same time, if only to avoid doing a lot of paperwork from scratch twice. I recommend opening a self-directed account with a discount broker, which will give her the broadest choice of investments. If she’s planning to buy a home or condo at some point, she should also consider opening a first home savings account, which will allow her to make tax-deductible contributions of up to $8,000 annually – with a lifetime limit of $40,000 – and to withdraw the money tax-free if it is used to purchase a first home.
When it’s time to make contributions, a tax-free savings account might be the best place to start, as it is the most straightforward of the three vehicles and offers the greatest flexibility for making withdrawals with no tax strings attached. Withdrawals from an RRSP, on the other hand, are added to one’s taxable income. What’s more, unlike with a TFSA, funds withdrawn from an RRSP are not added back to one’s contribution room.
E-mail your questions to jheinzl@globeandmail.com. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.