Taxation
Everyone loves taxes, right? The system that slices away a hefty chunk of your paycheck—often around 30% or more of your hard-earned income. While taxes fund essential public services, it’s understandable to want to keep as much of your earnings as possible.
The wealthy understand this concept deeply. They don't just rely on high-paying jobs; they make their money work for them by investing wisely. Luckily, in Canada, there’s a golden opportunity for all of us to grow wealth tax-free: the Tax-Free Savings Account (TFSA).
Tax-Free Savings Account (TFSA)
A Tax-Free Savings Account (TFSA) started in 2009 is a type of investment account in Canada where your money can grow without you having to pay taxes on the gains. When I first heard of it I assumed it was a literally savings account like the ones from the bank earning you 2 - 4%. It's kind of a misnomer though. Think of a TFSA as more of a “container” or “folder” that can hold different types of investments. It really should be called a Tax-Free Haven Account since everything in the account is completely tax free almost like you are hiding it in an off shore account. You can also have multiple TFSA just as long as your limit is not reached. You could place your money in a TFSA savings account, but you could also do a TFSA mutual fund, or stock, bonds whatever fits your fancy. There are many options than just a simple savings account.
Annual Contribution Limit
Each year, the government sets a specific contribution limit for the TFSA. For example, in 2023, the limit is $6,500. You can contribute up to this amount into your TFSA without owing any tax on the growth or withdrawals. If you don’t contribute the full amount in a given year, the unused portion rolls over to future years. So if you only contributed $2,500 in 2023, you’d have $4,000 carried over to add to your future contribution room. Contribution room depends on your age and lifetime contributions, starting from the year you turned 18 or from when the TFSA started (2009). This means each year adds to your total possible TFSA room, allowing Canadians to catch up on contributions if they missed some years.
For example, if you’ve never contributed to your TFSA and have been eligible since 2009, you’d have a total contribution room of around $88,000 in 2023. Which is a lot of cheddar to have invested while paying $0 in Tax
| Year | Contribution Limit |
| 2009 | $5,000 |
| 2010 | $5,000 |
| 2011 | $5,000 |
| 2012 | $5,000 |
| 2013 | $5,500 |
| 2014 | $5,500 |
| 2015 | $10,000 |
| 2016 | $5,500 |
| 2017 | $5,500 |
| 2018 | $5,500 |
| 2019 | $6,000 |
| 2020 | $6,000 |
| 2021 | $6,000 |
| 2022 | $6,000 |
| 2023 | $6,500 |
Say you have $88,000 the total amount currently allowed and you earned an average 8% return you would be looking at $7,040 tax free. If you reside in Alberta you would have to earn $9,778 to have the take home of $7,040 saving you $2,738 in taxes and deductions.
Why do TFSA Exist?
You see, the government of Canada, although full of lots of social programs, is not a charity. They still want their tax dollars but they also want their citizens to save their money. The program encourages saving money for homes, retirement or emergencies without the burden of taxation. Having citizens save money saves the government in the long run since they won't have to bear the burden of supporting those who didn't save for retirement with Guaranteed Income Supplement (GIS). The program, just like the Registered Retirement Savings Plan (RRSP) encourages responsible financial behavior.
So while you could be working hard each and everyday only for your paycheck to get gobbled up, or you could just sit back and let your money do the heavy lifting all without any government taxation.
How to know your TFSA contribution room
Log in to your CRA My Account: CRA My Account Login.Go to the Tax-Free Savings Account (TFSA) section.Review your TFSA Contribution Room. This page will have your RRSP deduction limit as well as your TFSA contribution room.
Crypto
Now what if you are a crypto bro that doesn't want to pay taxes on any of your precious coins. Direct ownership of cryptocurrencies (like Bitcoin or Ethereum) is not allowed within a TFSA so you will have to get creative. You will need to open a self-directed TFSA like on Wealth Simple and invest in crypto-focused ETFs like Bitcoin ETFs (BTCC) or Ethereum ETFs (ETHX). So when you make 2x or 4x on crypto you get to keep all the gains tax free.
Potential Earnings
So if you are investing without using a TFSA you are missing out on massive tax savings. Why pay taxes on your earnings when you could pay zero taxes on money earned with investing. For example: Say you invested $6000 a year ($500 a month) from 2009 to 2039 (30 years) you would have approximately $734,075.21 assuming a 8% return (and the fact that contribution limit isn't always $6000 a year). The $500,000 would be pure profit paying nothing in taxes, unlike earning half a million with wages would cost you roughly $125,000 in taxes.
Interest Rate: 8%
Principal Contributed: $180,000
Interest Earned: $528,806.62
Total: $708,806.62
Interest Rate: 9%
Principal Contributed: $180,000
Interest Earned: $677,190.32
Total: $857,190.32
Interest Rate: 10%
Principal Contributed: $180,000
Interest Earned: $859,646.36
Total: $1,039,646.36
S&P 500
Last 20 Years (2003–2023): The average annualized return of the S&P 500 is approximately 9–10% meaning these returns are not unrealistic based on historical data. Investing in VFV or VOO are great ways to invest in the whole of the S&P 500 in an easy to buy exchange-traded fund (ETF).
Whether you're new to investing or a seasoned pro, the TFSA is a powerful tool for building tax-free wealth. Why let taxes eat away at your gains when you can let your money work for you tax-free?
For more information about TFSA see the official government website:
If you found this helpful and would like help budgeting or investing please email me at taylormckeecoaching@gmail.com
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