Can Canadian residents invest tax free?

Highlights: Ways to invest tax-free in the country as Canadian residents

• Canada offers newcomers the ability to open a tax-free account (TFSA).
• The TFSA is an investment account allowing individuals to invest without paying taxes on their investment income.
• Canadian residents above 18 years old with valid SIN can open a TFSA.
• The annual contribution limit for TFSA account in 2024 is $7,000.

 

*Want to check your eligibility to migrate to Canada? Try the FREE Y-Axis Canada CRS Score calculator to get instant results!

 

About TFSA

TFAS is an investment account that can be used without paying taxes on their investment income. Individuals can take advantage of the TFSA and significantly reduce the income taxes payable on their investments over their lifetime. For example:

 

David contributed $7,000 to his TFSA in 2024 and continued to contribute $7,000 yearly from 2024 to 2025, earning an average annual compounded return of 6%.

 

At the end, David will receive investment returns of $868,333.78.

 

If his marginal income tax rate is 30%, David will save $260,500.13 in income tax (assuming interest income).

 

*Want to apply for TSFA? Sign up to Y-Axis to get complete guidance.

 

Individuals who can contribute

Canadian residents of 18 years or older can have a valid SIN (Social insurance number) and can open a TFSA. To contribute, it doesn’t matter what legal status the individual has in Canada (for example, temporary resident, work/study permit, permanent residence, or citizenship). It is important for TFSA, that the individual must be considered as a Canadian resident for income tax purposes.

 

Contribution Limit

Individuals who can open a TSFA account can contribute if they are 18 years old and a Canadian resident. The annual contribution limit for 2024 is $7,000. This limit started at $5,000 in 2009 and is indexed to inflation, rounded to the nearest $500.

 

If someone who was 18 years old in 2009 and has lived in Canada since then he would have maximum contribution room of $95,000.

 

TFSA account allows holders to withdraw funds from their account any time and will not be taxed. The withdrawal amount will be added to their contribution room for the next year.

 

If an individual exceeds their contribution limit, they face a penalty. The Canada Revenue Agency (CRA) taxes 1% per month on the excess contributions until they are withdrawn.

 

For example:  if David turns 18 in 2024 and contributes $8,000 to his TFSA, he will exceed his contribution room by $1,000. If David realizes his mistake three months later and withdraws the $1,000 in excess contributions, he will owe the CRA $30 in taxes ($1,000 x 1% x 3).

 

An individual can look up their TFSA contribution limits on their CRA My Account, but those figures might be misleading, for they are usually an entire year out of date. The TFSA holder’s responsibility is to keep their records to ensure they don’t exceed their contribution limit.

 

*Want to apply for Canada Start-Up Visa Program? Talk to Y-Axis for complete guidance.

 

Investment that can be held in a TFSA

Many TFSAs allow clients to hold and deposit cash; some individuals may use them for short-term or medium-term savings. However, TFSAs are better for long-term investments such as mutual funds, exchange-traded funds (ETFs), stocks, bonds, and GICs (guaranteed investment certificates).

 

Individuals will benefit more from the TFSA when they hold higher-yield investments inside the account. Most institutions have rules similar to those of an RRSP regarding what can be held in a TFSA.

 

Individual who became a Non-Resident of Canada

If an individual becomes a non-resident of Canada, they can still access their TFSA, and they will not be taxed in Canada on their investment income or withdrawals. Individuals will not be credited to the contribution room for any year during which they’re a non-resident of Canada.

 

A non-resident of Canada will be added to their next year contribution room if there is any withdrawal from the account. However, they cannot use this contribution if they don’t re-establish their Canadian residency.

 

Individuals who have become non-residents of Canada should not continue contributing; as non-residents, any contributions they make will be taxed at 1% per month.

 

Ways to open a TFSA

All Canadian financial institutions that provide investment accounts will allow eligible clients to open a TFSA.

 

Note: If the holder of a TFSA dies, they can pass the account to their spouse or common-law partner as the successor holder. The spouse will not be taxed on any earnings or withdrawals from the holder’s account.

 

*Are you looking for step-by-step assistance for Canada Immigration? Talk to Y-Axis, the leading overseas immigration consultancy in Australia.

 

For recent immigration updates, check out Y-Axis Canada Immigration News!