Insights and Advice

TFSA 2025 - A Quick Summary

Dec 18, 2024

As we head into 2025, the Tax-Free Savings Account (TFSA) remains one of the most powerful tools for Canadian families looking to build wealth and save for the future. With new updates and opportunities on the horizon, it’s the perfect time to explore how these changes can help you maximize your savings—whether you’re planning for a vacation, your children’s education, or retirement. Here’s a look at what’s new and how these updates can benefit you and your family’s financial journey.

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What is a TFSA
Who can Open a TFSA
TFSA Contribution Room 2025
Permitted Investments
Withdrawal and Replacements
TFSA Payment of Taxes
Impact on Government Benefits
Transfers and Death of a TFSA Holder
Segregated Funds

What is a TFSA

The Tax-Free Savings Account (TFSA), launched in 2009, allows individuals aged 18 and older with a valid Social Insurance Number (SIN) to save money tax-free for their lifetime. While contributions are not tax-deductible, any income earned (such as investment gains or capital gains) is tax-free, even when withdrawn. However, administrative fees or interest on borrowed money for contributions are not tax-deductible.

Who can Open a TFSA

If you’re a Canadian resident and you’re 18 or older with a valid SIN, you can open a TFSA (Tax-Free Savings Account). If you’re living outside Canada but still meet the same requirements, you can open a TFSA too. However, if you’re a non-resident and add money to your TFSA, you’ll have to pay a 1% tax for every month the money stays in the account.

You can’t open or contribute to a TFSA until you turn 18, but once you do, you can contribute up to the full amount allowed for that year.

TFSA Contribution room 2025

The CRA has confirmed that the annual TFSA contribution limit for 2025 is $7,000.

Your contribution limit starts the year you turn 18 and TFSA’s were introduced in 2009.
The Lifetime Limit on January 1, 2024 is now $102,000.
You can carry forward any unused contribution room from previous years.
If you contribute more than your total contribution room, the Canada Revenue Agency (CRA) will charge you a penalty of 1% per month on the excess amount.
You can withdraw from a TFSA at any time.
There are no limits as now how much you can withdraw from your TFSA account
You can withdraw from your TFSA at any time
Withdrawals from your TFSA are not taxed as long as you are not engaging in day trading or conducting business activities.

Permitted Investments

Cash – Money held in TFSA that earns tax-free interest
Mutual funds – Pooled investments in stock, bonds, or other securities
Securities listed on a designated stock exchange – Stocks, ETFs, and bonds listed on recognized exchanges
Guaranteed investment certificates – Low-risk, fixed-term investments
Bonds – Debt securities issued by government or companies
Certain shares of small business corporations – Shares in Canadian-controlled private companies that qualify under tax rules

Withdrawals and Replacements

You can generally withdraw any amount from your TFSA at any time, and withdrawals do not reduce your contribution room for the year. However, withdrawn amounts are only added back to your contribution room at the beginning of the next year. If you re-contribute any withdrawn funds in the same year, you can only do so if you have available contribution room; otherwise, you’ll face a 1% tax on the excess amount for each month it stays in your TFSA. For example, if you withdraw money in 2022, it will be added to your contribution room in 2023. Re-contributing the same funds before 2025 without room will result in a penalty.

TFSA Payment of Taxes

Most TFSA holders do not owe taxes on their investments, and generally, no tax return is required unless certain conditions apply. If taxes are owed, however, Form RC243 (TFSA Return) must be filed by June 30 of the following year, with any taxes due also required by this date.

In cases where TFSA holders exceed their contribution limits, the CRA may issue a notice, which could include Form RC243-SCH-A (Excess TFSA Amounts). If the excess contributions are removed, no further action is required; otherwise, the excess must be corrected immediately.

The CRA may also send a proposed TFSA return based on information from financial issuers. If the proposed return is accepted, taxes can be paid, or if disputed, the taxpayer must provide a detailed explanation and supporting documentation.

Additionally, the CRA may waive or cancel taxes in certain cases, such as if the error was reasonable or part of another taxable transaction. A letter explaining the situation should be submitted to request this relief.

Impact on Government Benefits

For people who receive government benefits (like Old Age Security (OAS) or the Canada Child Benefit (CCB)), a TFSA is a great tool because the money you earn or withdraw from your TFSA does not affect your eligibility for these benefits.

Income earned in a TFSA (like interest or investment gains) and withdrawals from your TFSA don’t count as income when the government calculates your benefits. This means you won’t lose or have to repay benefits like OAS, GIS, or CCB because of your TFSA earnings.

Transfer and Death of a TFSA Holder

TFSA Transfers

Direct transfers between TFSAs have no tax consequences.
Withdraw and redeposit into another TFSA is treated as a new contribution, risking over-contribution penalties if you exceed your limit.

Breakdown of Marriage/Partnership

You can transfer TFSA funds to your former partner without affecting your contribution room.
Withdrawals and redeposits are treated as regular contributions and affect your room.

Death of TFSA Holder

Successor holder inherits the TFSA with no tax on its value or income.
Excess TFSA amounts at death incur a 1% monthly tax on the excess.
Designated beneficiaries can add funds to their own TFSA (if they have room) without tax, but survivors may contribute as an exempt contribution.

Key Takeaways

- Direct transfers = No tax.
- Withdraw and redeposit = Risk of penalties.
- Successor holders = Inherit tax-free.
- Excess at death = 1% monthly tax.

Segregated Funds

One of the most effective way to leverage your TFSA is by investing in segregated funds. These funds not only offer the potential for growth within tax-free environment of a TFSA but also provide added protection through insurance guarantees, such as principle protection. Segregated funds is an ideal choice for those looking to balance risk with security while taking full advantage of their TFSA benefits.

Furthermore, segregated funds can be part of an overall diversified investment strategy within a TFSA, aligning with both short-term and long-term financial goals. Whether you’re aiming for growth, estate planning benefits, or simply seeking peace of mind, segregated funds can be a valuable addition to your TFSA portfolio, ensuring that your hard-earned savings grow securely and tax-free.

At AI Financial, we specialize in helping our clients maximize their financial potential by providing personalized solutions for investing in segregated funds. Our unique approach involves facilitating loans that allow individuals to invest directly into these funds, harnessing the power of leverage to grow their wealth.

With over 20% returns over the past decade, segregated funds have proven to be a powerful investment vehicle. By working with AI Financial, you gain access to this high-performing option while we manage and oversee the entire investment process, ensuring your money is working for you with optimal security and growth.

Whether you’re looking to build long-term wealth or seeking greater control over your financial future, AI Financial is committed to guiding you through the loan process and investment strategy. Our goal is simple: help you unlock the full potential of segregated funds within your financial plan, giving you the confidence to achieve your financial goals.

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