Avoid these 6 TFSA Mistakes in 2022

In December 2021 the federal government announced that the 2022 annual TFSA limit will remain at $6,000. This means the cumulative tax-sheltered lifetime limit is now at $81,500.

As I have explained to many clients, there is no “downside” to owning a TFSA, any TFSA is better than no TFSA. However, many people make mistakes with the accounts which can cost them in the long term.

Here are the 6 most common mistakes made by Canadians

#1 – Appointing a spouse as Beneficiary rather than as Successor Owner

  • If a spouse is appointed beneficiary, the proceeds are paid out tax-free and the deceased’s TFSA is closed. The surviving spouse cannot add this payout to their TFSA if they are already at their lifetime maximum.
  • However, if a spouse is selected as “Successor Owner” the account is transferred intact to the survivor. This means that the spouse has their own $81,500 cumulative TFSA room plus the $81,500 maximum from the deceased spouse totaling $163,000 – this is assuming both spouses had made their maximum lifetime deposits.

#2 – Having the Estate as Beneficiary rather than a named individual (assuming no spouse)

  • If the Estate is selected all proceeds are subject to probate fees and there may potentially be a long delay in settling the estate of the deceased.
  • However, if a named individual such as a child, parent, sibling, or close friend is appointed, the proceeds are paid tax-free to the beneficiary, all with zero tax liability to the estate.

#3 – Allowing the Bank or Credit Union to select their version of a “Safe” Investment

  • While no one wishes to lose money on their investments, many err too far on the side of caution and pay a huge price in returns.
  • One of the dark secrets of banking is that many financial instructions will select a Daily Interest Account (DIA) for those that wish to be “conservative’ in their investment thinking. With interest rates at a historical low, a DIA with the bank could be as low as 0.10%.
  • What the bank or credit union does not tell their customers is that a DIA account is the most profitable for the bank as the deposits are often used as a car or personal loan to other consumers.  Depending on one’s credit history a personal loan can be between 5% – 10%, yet the bank is paying rock bottom rates on the DIA or GIC deposit.

#4 – Using the TFSA for full-time speculation purposes

  • CRA has made it very clear for those that “actively trade” stocks in their tax-sheltered accounts, that the growth will be treated differently. CRA will examine the frequency of trading and the duration an asset is held, to determine if the growth should be treated as “Business Income”.
  • If you are a Day Trader or manage your investments, ensure you don’t go offside with CRA on this rule as the tax reassessment can be crushing.

#5 – Investing too heavily in foreign assets earning dividends

  • Buying individual foreign stock can come with a tax surprise as a 15% Withholding Tax can be applied to foreign dividends paid out.
  • If you are a DIY investor, ensure you ask this question to the company hosting your trading platform.
  • Withholding tax can be avoided if the assets are held in a Canadian-based Mutual or Segregated Fund.

#6 – Not asking your advisor or fund management company about hidden fees

  • The last decade has seen a race to the bottom by many fund companies to get the lowest possible management fee (called a MER) that can be advertised. The issue now is that the same fund company that advertises the lowest MER makes it up in other ways. 
  • Recently a very surprised client of mine was charged $275 for each of two TFSAs that were closed by Qtrade and moved to my management. This is the same company that heavily advertises its MER as one of the lowest in Canada.

Summary

If you work with an advisor ensure you discuss these six points in your next annual review. If you are a DIY Investor, ask the questions to the investment company handling your assets and request a reply in the form of an email you can permanently store.