The CRA recently announced the Tax Free Savings Account (TFSA) contribution limit for 2021 will be $6,000.00. This is in line with the annual limits for 2020 and 2019 and means that anyone who was 18 years old in 2009 when TFSAs were introduced has a lifetime contribution limit of $75,500.00. For those who have been contributing to their TFSAs since 2009, this announcement means you can start your planning for how to contribute next year. For those who are new to TFSAs and wondering what this means for you, read on.

Tax Free Savings Accounts are, as the name suggests, tax free savings vehicles. Funds that are put into these accounts grow tax free. You do not pay taxes on income earned within the TFSA and, unlike that other popular tax sheltered vehicle the RRSP, you do not pay taxes when you withdraw funds from the TFSA either (the trade-off here is that TFSA contributions are not tax deductions in the year you make them). Every year the CRA announces an annual contribution limit and as of January 1, investors can add that amount to their TFSA. As an added benefit, the contribution room is cumulative, so if you miss a year's contribution you can make it up at any time.

When these accounts were first announced in 2009, many banks seized on the savings part of the name and promoted them as vehicles for everyday funds. The problem with this approach is that in a world where you need a microscope to see the interest rates on daily savings accounts, there isn't much benefit to putting these funds in a tax-sheltered environment. Fortunately, the TFSA is a much more versatile vehicle than just a simple savings account.

To put it simply, Tax Free Savings Accounts should also be considered tax free investment vehicles. One of the best features of the TFSA is that you can hold multiple types of investments within one. Equities, bonds, mutual funds, ETFs, etc. - pretty much anything you can put in your RRSP or non-registered account you can hold in a TFSA. This means that capital gains and dividend income earned by equity investments will not be taxed. Similarly, interest income from bonds is also exempt from tax. This is particularly beneficial as interest income is the least tax-efficient type of income that can be earned, with 100% of the income generated being taxed at an investor's marginal tax rate.

In my view, the TFSA is an integral part of an investment portfolio. If you currently have investments in a non-registered account but have not maximized your TFSA, this should be one of the first items on your list at your next review. Contact us today to see how you can use a TFSA as part of your investment plan.