Businesswoman using laptop in office

A new year means more TFSA contribution room.

In late November, the Canada Revenue Agency confirmed that the TFSA dollar limit would remain at $6,000 for 2020. This is likely no real surprise to many advisors who have become familiar with the somewhat unusual indexation rules for the annual TFSA dollar limit.

The TFSA was formally introduced in the 2008 federal budget and Canadians could first contribute up to $5,000 for the 2009 calendar year. The TFSA dollar limit remained at $5,000 for 2010, 2011 and 2012, before it increased to $5,500 for 2013 and 2014. In 2015, it was increased to $10,000, before being dropped back to $5,500 for 2016, 2017 and 2018.

In 2016, the annual TFSA dollar limit was indexed to inflation, retroactive to 2009’s $5,000 limit, but rounded to the nearest $500 to make the annual limits easy to remember. Each fall, the CRA announces the indexation increase for the following calendar year. The “indexation factor” of 1.9%, which is the rate used to increase the federal tax brackets from 2019 to 2020 and most federal credits, wasn’t enough to push the TFSA dollar limit for 2020 to the next $500, which is why it will be remaining at $6,000 for 2020.

Fortunately, unused TFSA contribution room can be carried forward to future years such that the cumulative limit in 2020 for someone who has never contributed could be as high as $69,500. In other words, if your client was at least 18 years of age in 2009 and resident of Canada throughout that period and has never opened up a TFSA before, they could contribute the entire $69,500 to their TFSA today.

While TFSA contributions are made with after-tax dollars, once the funds have been contributed, they grow tax-free, for life. TFSA funds may be withdrawn, tax-free, at any time, for any reason, and because the withdrawals aren’t considered to be income, they don’t negatively impact income-tested benefits and credits, like the Guaranteed Income Supplement, Old Age Security payments or the age credit. Any amounts withdrawn from a TFSA can be recontributed, beginning the following calendar year, without using up TFSA room.

But can TFSAs be made even better? Alexandre Laurin, the C.D. Howe Institute’s director of research and the author of a new report on TFSAs entitled “TFSAs: Time for a Tune-Up,” certainly thinks so.

In his report, Laurin suggests that the government could make TFSAs even more useful for Canadians by making some changes.

For retirees, he recommended allowing the purchase of life annuities — including advanced deferred life annuities (ALDAs) and variable payment life annuities (VPLAs), which are being considered under draft legislation — within a TFSA, which would shield the interest portion of the payouts from tax. He also encouraged a change to the tax rules that would permit someone to not just inherit their deceased spouse’s TFSA assets, but also utilize any unused TFSA contribution room within certain limitations. This is possible with RRSPs, where a surviving spouse can use the deceased spouse’s unused RRSP room upon death and claim a deduction on the deceased’s terminal return.

Laurin also wants Canada to try to deal with the problems facing U.S. persons who own TFSAs. Under the Canada-U.S. Tax Treaty, dual citizens of Canada and the U.S. who hold RRSPs may defer taxation of income earned in the plan in the U.S. until withdrawals are made, but no such concession is made for TFSAs. Dual citizens are also spared from paying withholding taxes on dividends earned within their RRSPs or RRIFs, but this exemption doesn’t apply to TFSAs.

“While this may be easier said than done, the federal government should make every effort possible to resolve these two U.S. tax irritants,” Laurin said.