July 6, 2023 | Eul Basa

TFSAs and Tax: What You Need To Know


Tax season in Canada can be stressful, especially if you are ill-prepared for it. There are many ways you can make the most out of your taxes each year; however, many Canadians are unaware of these strategies.

Tax-Free Savings Accounts, for example, are incredibly valuable to Canadians who regularly put aside their money. While the contributions made to a TFSA are not deducted from one's income to reduce the amount of tax one owes, having a TFSA does offer other tax advantages that could help you keep more of your hard-earned income—and grow it too.

The biggest advantage of having a TFSA is that no taxes are applied on any investment income that is earned within the account, including interest, dividends, or capital gains. This means that all the money you earn from the investment vehicles that are tied to your savings within a TFSA pretty much remains as-is, with no losses to tax. Additionally, withdrawals from the account are also non-taxable and are not considered with your total income.

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If you already own shares but they are not in a TFSA yet, you can actually deposit them into one via a transfer method called an "in-kind" contribution. In-kind contributions save you the trouble of having to sell your shares in order to deposit the corresponding money into your TFSA. In order to do this, you will have to open a TFSA at a bank and provide them with the necessary share certificates. The contribution amount will be based on the fair market value of the shares on the day the deposit is made.

Once your shares are in a TFSA, the cash from the dividends will be directly deposited into the TFSA rather than sent to you via mail. You will also no longer receive a year T5 tax slip, which indicates your dividend earnings as well as the amount you have to declare on your income tax return, saving you from having to do that extra step every tax season.

The one "catch" to this is that you will have to report any capital gains on your income tax return in the year that you made the in-kind contribution; though any future gains your shares make while in your TFSA will never be taxable. Also, it is important to remember that the annual TFSA contribution limit for 2022 is $6,000, and unused contribution room can be carried forward to future years, so if you've never maxed out your TFSA contribution room, you will have a lot to work with!

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