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The Shocking Mistake Most Canadians Make With TFSAs


One of the clever inventions in Canada is the Tax-Free Savings Account (TFSA). A Canadian citizen or resident who is 18 or older and has a valid Social Insurance Number (SIN) can open a TFSA. The crafters introduced five salient features, but some users don’t maximize the benefits because of the name.

Cash is king, but not in a TFSA. Holding cash is the shocking mistake most Canadians make in a TFSA. The investment account helps users achieve short- and long-term savings goals. Idle cash has a negative value or earns $0.

Income-producing assets such as mutual funds, Guaranteed Investment Certificates (GICs), bonds, and stocks are eligible investments in a TFSA. The Canada Revenue Agency (CRA) won’t tax any income, capital gains, and dividends, provided you earn them within set rules.

The benefits of not holding cash in a TFSA

As mentioned above, there is no tax on earnings inside a TFSA. The CRA will intervene if you exceed the contribution limits and carry on a business by frequently buying and selling stocks.

If TFSA contributions and earnings are tax-free, so are withdrawals. You can take money out from your TFSA without the risk of penalties. Any withdrawal adds back to your contribution limit in the next year. Also, unused contribution rooms carry over year to year, so don’t fret about not maxing out the limit.

Unlike the Registered Retirement Savings Plan (RRSP), the TFSA has no upper age limit for contributions. You can contribute as long as you want, even throughout your lifetime.

Besides the tax-savings feature, the TFSA does not impact on federal income-tested benefits like the Old Age Security, the Guaranteed Income Supplement or the Canada Child Tax Benefit.

Dividend payers Extendicare (TSX:EXE) and Savaria (TSX:SIS) are ideal investment options for future and current retirees.

Growing demand for senior care

Extendicare trades at $6.47 per share and pays a generous 7.42% dividend. The $540.3 million company operates long-term-care (LTC) homes and retirement communities and offers LTC and home healthcare services for seniors in Canada.

The global pandemic hurt the business, but it is slowly recovering. In the third quarter (Q3) of 2023, revenue and net operating income (NOI) increased 4.4% and 49.7% to $322.5 million and $35.2 million versus Q3 2022.

Extendicare’s president and chief executive officer (CEO), Dr. Michael Guerriere, said, “The trend of positive sequential growth we are seeing across our operating segments confirms the compelling market opportunity emanating from the growing demand for seniors’ care.”  

Thriving business and strong metrics

Savaria trades at $14.75 per share and pays a decent 3.88% dividend. The $1.01 billion company provides accessibility solutions for the elderly and physically challenged. The business in the special industrial machinery industry thrives amid a challenging environment.

In Q3 2023, revenue, net earnings, and operating income rose 7.5%, 11.8%, and 18.6% year over year to $620 million, $26.9 million, and $52.3 million. Its president and CEO, Marcel Bourassa, said, “This third quarter is the best-ever quarter presented by Savaria. The metrics were strong despite global volatility.

For the young and old

The TFSA encourages Canadians to save, invest and secure their financial futures. Since it has no expiry date, retirees can also keep earning tax-free income.  

The post The Shocking Mistake Most Canadians Make With TFSAs appeared first on The Motley Fool Canada.

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More reading

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Fool contributor Christopher Liew has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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