Year-End Tax Planning for Tax-Free Savings Accounts: Top TFSA Moves You Should Make Before the End of 2024

The 2024 taxation year is almost done, and it’s time to take advantage of year-end tax-planning strategies that allow you to maximize the tax benefits of your Tax-Free Savings Account (TFSA).

Introduced in 2009, a TFSA allows Canadian individuals to earn investment income and capital gains on a tax-free basis. You cannot claim a deduction for your TFSA contributions, but your earnings within the TFSA accumulate tax-free. Moreover, you pay no tax when you withdraw the profits that you racked up within your TFSA. In other words, as the name suggests, a Tax-Free Savings Account essentially allows you to grow your after-tax savings (as contrasted with the pre-tax savings in an RRSP) on a tax-free basis.

This article lists the top 2024 year-end TFSA tax-planning tips from our esteemed Canadian tax lawyers.

1. Max Out Your 2024 TFSA Contribution Room & Create a Roadmap for 2025 Contributions

If you haven’t already, you should maximize your 2024 TFSA contribution room. Your 2024 TFSA dollar limit was $7,000. Your overall TFSA contribution room may be even greater if you didn’t max out your TFSA in previous years or if you withdrew funds from your TFSA in previous years. Your 2024 TFSA contribution room is the total of the following three amounts: (1) your $7,000 TFSA dollar limit for 2024, (2) the amount of any withdrawals from your TFSA during the 2023 year, and (3) your unused TFSA contribution room from previous years.

The TFSA dollar limit for 2025 will also be $7,000. So, to amplify the tax savings on your investments, create a roadmap of your 2025 TFSA contributions by dividing the $7,000 contribution limit by 12 and setting up automatic monthly TFSA investments in that amount. Of course, if you have additional TFSA contribution room because of prior years’ withdrawals or unused room from prior years, you should account for this additional TFSA contribution room when calculating your monthly contributions for 2025.

2. Verify the CRA’s Calculation of Your TFSA Contribution Room & Maintain Supporting Documents

You can review the Canada Revenue Agency’s calculation of your TFSA contributions and your available TFSA contribution room through your online CRA account (i.e., your CRA MyAccount).

But you should beware that if you check during the first few months of the year, the CRA’s figures may very well be incorrect. This is because financial institutions don’t file their TFSA informational returns until the end of February, and it takes another couple of months for the Canada Revenue Agency to update the newly reported TFSA information on each taxpayer’s online CRA account. As a result, if you check your CRA account during the first few months of the year, there’s a good chance that the CRA’s calculations of your TFSA contribution room for that year will be incorrect, which leaves you vulnerable to TFSA overcontributions.

So, during the first few months of the year, you should verify the accuracy of the CRA’s TFSA calculations by reviewing your TFSA account statements from your own financial institutions. In particular, you should check whether you’ve made any prior-year TFSA contributions or prior-year TFSA withdrawals that the CRA’s calculations don’t reflect. If so, you should use the institutional information to do your own calculation of your current year’s TFSA contribution room, and you should plan your current year’s TFSA contributions around your own, verified calculations. Of course, you should also retain the TFSA account statements supporting your calculations. You’ll need to produce them if the Canada Revenue Agency audits your TFSA contributions or alleges that you overcontributed to your TFSA. For assistance with accurately calculating your TFSA contribution limit, consult one of our Canadian tax lawyers.

By now, the Canada Revenue Agency should have updated its calculation of your 2024 TFSA contribution room, so if you performed your own calculations earlier in the year, you should now cross-reference the CRA’s calculation to confirm that it matches. If the Canada Revenue Agency’s calculation still doesn’t match the calculation based on your TFSA account statements, contact our Canadian tax lawyers to discuss your options.

3. Strategize Your TFSA Withdrawals

A Tax-Free Savings Account (TFSA) allows you to earn tax-free income—i.e., dividends, interest, and capital gains—from the investments that you hold within your TFSA. You can only contribute up to a specified amount to your TFSA each year. For instance, the 2024 TFSA contribution limit was $7,000. The 2025 TFSA contribution limit is also $7,000. The contribution limit applies only to the funds that you transfer into your TFSA. In other words, your TFSA contribution limit isn’t affected by the investment income that you earned from the investments already sitting in your Tax-Free Savings Account.

You can also make a tax-free withdrawal from your TFSA whenever you wish.  Any amount that you withdraw from your TFSA this year is added to your contribution limit on January 1^st of the following year. For example, suppose that you withdraw a total of $2,000 from your TFSA in 2024. That $2,000 withdrawal will be added to the $7,000 in TFSA contribution room that you get for the 2025 tax year. So, for 2025, you can contribute $9,000 to your TFSA without exceeding your TFSA contribution limit.

So, if you plan on withdrawing funds from your Tax-Free Savings Account, you should do it now. That is, you should withdraw the TFSA funds before December 31, 2024. This allows you to replace the funds on or after January 1, 2025. By contrast, if you make the TFSA withdrawal in January 2025, you’ll need to wait until 2026 before you can re-contribute those funds.

4. Designate A “Successor Holder” for Your TFSA

A Tax-Free Savings Account offers numerous tax benefits, yet many Canadian taxpayers neglect to consider their TFSA when devising an estate plan. Now is the perfect time to review your estate plan, including any tax planning concerning your Tax-Free Savings Accounts.

When the owner of a TFSA dies, the tax consequences turn primarily on whether the owner had a surviving spouse or common-law partner who qualified as the TFSA’s “successor holder.” To qualify as the “successor holder” of a Tax-Free Savings Account, an individual must meet all the following conditions:

1. The individual was the spouse or common-law partner of a TFSA holder at the time of the holder’s death;
2. The individual was named by the deceased TFSA holder as the TFSA’s successor holder—either by the deceased’s will or by a successor-holder designation that the deceased had filed with the financial institution maintaining the TFSA; and
3. The individual acquired all the deceased’s rights under the TFSA—especially the right to revoke a beneficiary of the TFSA.

When the Tax-Free Savings Account’s original holder dies, the successor holder basically becomes the new account holder. As a result, the account retains its status as a TFSA, and the successor holder doesn’t incur any tax for receiving the deceased’s TFSA funds or on any income earned within the TFSA after the original owner’s death.

Moreover, the value or cost of the newly acquired Tax-Free Savings Account doesn’t affect the successor holder’s TFSA contribution room unless the deceased overcontributed to the TFSA before death. If the deceased overcontributed into the TFSA, the amount of the deceased’s overcontribution will reduce the successor holder’s contribution room.

If a successor holder hasn’t been appointed at the time of the original TFSA holder’s death, then the account loses its status as a TFSA following a one-year grace period, after which the account is (i) deemed to dispose of its holdings for fair market value and (ii) treated as an inter vivos trust for tax purposes.

To ensure that your spouse qualifies as the successor holder of your TFSA, speak to one of our expert Canadian tax lawyers today.

5. Confirm that your TFSA Contains only “Qualified Investments”

A TFSA holder incurs steep penalties and tax liability for holding non-qualified investments within a Tax-Free Savings Account. If the TFSA acquires a non-qualified investment or if an existing TFSA investment becomes a non-qualified investment, then the TFSA holder suffers a TFSA penalty tax equal to 50% of the fair market value of the non-qualified investment. In addition, the TFSA holder must pay tax on any income from the non-qualified investment or any capital gain from disposing of the non-qualified investment.

Per the definition in Canada’s Income Tax Act, a “qualified investment” refers to the following:

• money, GICs, and other deposits;
• most securities listed on a designated stock exchange, such as shares of corporations, warrants and options, units of exchange-traded funds, and real estate investment trusts;
• mutual funds and segregated funds;
• Canada Savings Bonds and provincial savings bonds;
• debt obligations of a corporation listed on a designated stock exchange;
• debt obligations that have an investment-grade rating; and
• insured mortgages or hypothecs.

In short, a “qualified investment” essentially refers to money and securities that are listed on a designated stock exchange.

Notably, a qualified investment does not include cryptocurrencies, such as Bitcoin, Ethereum, Dogecoin, Dash, Tao, and XRP. Nor does it include non-fungible tokens (NFTs). That said, the investment market has seen a recent surge in cryptocurrency-based ETFs (or exchange-traded funds), many of which are listed on designated stock exchanges.

So, while cryptocurrencies themselves aren’t “qualified investments,” many of the publicly listed cryptocurrency-based ETFs are. In particular, the cryptocurrency-based ETF meets the definition of a “qualified investment” if the fund appears on a designated stock exchange, such as the Toronto Stock Exchange (TSX), the New York Stock Exchange (NYSE), or any of the other Canadian or international stock exchanges that Canada’s Minister of Finance has designated for the purposes of Canada’s Income Tax Act.

If you require assistance determining whether your TFSA holdings consist of non-qualified investments, schedule a consultation with our Canadian tax lawyers today. In addition, our expert Canadian tax lawyers have assisted numerous clients with applications to cancel their TFSA penalty taxes. Subsection 207.06(2) of Canada’s Income Tax Act gives the Canada Revenue Agency the power to cancel some or all of the TFSA penalty tax resulting from holding non-qualified investments—like cryptocurrencies, non-fungible tokens, or shares in private corporations—in your Tax-Free Savings Account.

Our Canadian tax lawyers can carefully plan and promptly prepare your subsection 207.06(2) application. A properly prepared TFSA-penalty-cancellation application not only increases the odds that the CRA will grant relief but also lays the groundwork for a judicial review application to the Federal Court should the CRA unfairly deny your application and refuse to cancel your TFSA penalty taxes.

6. Confirm that You Haven’t “Carried on a Business” in Your TFSA

Now is a good time to ask a Canadian tax lawyer to review your TFSA transactions and screen whether you need to report business income generated within your TFSA. If your Tax-Free-Savings Account “carries on a business,” the resulting business income is taxable under subsection 146.2(6) of Canada’s Income Tax Act. In other words, while you pay no tax on any interest, dividends, or capital gain that accumulates within your TFSA, you will incur tax on any business income that’s generated within your TFSA. The problem is that many securities transactions straddle the line between capital transactions and transactions resulting in business income.

Indeed, a few years ago, the Canada Revenue Agency instituted an aggressive tax audit campaign targeting high-balance TFSAs, which, according to the CRA’s tax auditors, resulted from taxpayers who carried on a business within their Tax-Free Savings Accounts.

When auditing a TFSA, the Canada Revenue Agency applies several factors to determine whether the account carried on a business and thereby earned taxable business income. The following factors may cause the Canada Revenue Agency to conclude that your TFSA carried on a business:

• you conduct frequent securities transactions within your TFSA;
• you quickly relinquish ownership of the securities in your TFSA;
• you demonstrate extensive knowledge of or experience in securities markets;
• securities transactions form a part of your ordinary business or employment;
• you spend ample time studying securities markets and potential purchases;
• you use debt financing to purchase securities that you transfer to your TFSA;
• you advertise your willingness to purchase securities; and
• the securities within your TFSA are speculative in nature or do not distribute dividends.

These factors reflect the Canada Revenue Agency’s interpretation of a long line of Canadian tax cases wrestling with the question of whether a gain or loss from selling securities should be on an income account or capital account. The CRA also insists that extraordinary growth within your Tax-Free Savings Account serves as an important indicator of business activity.

According to the methodology that the CRA employs, your status as an amateur investor doesn’t guarantee that you’ll escape a TFSA tax audit. Although professional investors who trade within their TFSAs seem a more likely target, amateur investors generating large TFSA balances by using a frequent-trading strategy may also find themselves the target of a CRA tax audit.

If your exposure to a TFSA tax audit concerns you—or if you’re already the subject of a TFSA audit—book a consultation with one of our knowledgeable Canadian tax lawyers today.

FREQUENTLY ASKED QUESTIONS

How do I calculate my TFSA contribution room for 2024?

Your 2024 TFSA contribution room is the total of the following three amounts: (1) your $7,000 TFSA dollar limit for 2024, (2) the amount of any withdrawals from your TFSA during the 2023 year, and (3) your unused TFSA contribution room from previous years.

I calculated my 2024 TFSA contribution room using the TFSA account statements that I received from my bank. But when I reviewed my online CRA account, the amount that I calculated doesn’t match the 2024 TFSA contribution room that the CRA calculated. It appears that the CRA’s calculation omits a few of my TFSA withdrawals from last year. Why is that? Does this mean that my TFSA contribution-room calculation is incorrect?

The CRA’s calculation may very well be incorrect, especially if you checked during the first few months of 2024. This is because financial institutions don’t file their TFSA informational returns until the end of February 2024, and it takes another couple of months for the Canada Revenue Agency to update the newly reported TFSA information on each taxpayer’s online CRA account. As a result, if you check your CRA account during the first few months of 2024, there’s a good chance that the CRA’s calculations of your 2024 TFSA contribution room will be incorrect.

Now that we’re near the end of 2024, the Canada Revenue Agency should have updated its calculation of your 2024 TFSA contribution room, so if you performed your own calculations earlier in the year, you should now check the CRA’s calculations again. Your TFSA calculations should now match the CRA’s calculation. If the Canada Revenue Agency’s calculation still doesn’t match the calculation based on your TFSA account statements, contact our Canadian tax lawyers to discuss your options.

Can I hold Bitcoin and other cryptocurrency in my TFSA?

No. You can only hold “qualified investments” in your TFSA. A “qualified investment” essentially refers to money or securities that are listed on a designated stock exchange. The definition of “qualified investment” excludes cryptocurrency. That said, although cryptocurrencies themselves aren’t “qualified investments,” many of the publicly listed cryptocurrency-based ETFs are. In particular, the cryptocurrency-based ETF meets the definition of a “qualified investment” if the fund appears on a designated stock exchange, like the Toronto Stock Exchange (TSX), the New York Stock Exchange (NYSE), or any of the other Canadian or international stock exchanges that Canada’s Minister of Finance has designated for the purposes of Canada’s Income Tax Act.

A TFSA holder incurs steep penalties and tax liability for holding non-qualified investments within a Tax-Free Savings Account. If the TFSA acquires a non-qualified investment or if an existing TFSA investment becomes a non-qualified investment, then the TFSA holder suffers a TFSA penalty tax equal to 50% of the fair market value of the non-qualified investment. In addition, the TFSA holder must pay tax on any income from the non-qualified investment or any capital gain from disposing of the non-qualified investment.

If you require assistance determining whether your TFSA contains non-qualified investments or if you’ve incurred TFSA penalties because your TFSA held non-qualified investments, schedule a consultation with our Canadian tax lawyers today.

DISCLAIMER: This article just provides broad information. It is only up to date as of the posting date. It has not been updated and may be out of date. It does not give legal advice and should not be relied on. Every tax scenario is unique to its circumstances and will differ from the instances described in the article. If you have specific legal questions, you should seek the advice of a Canadian tax lawyer.