Is a TFSA a trading account?
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- Updated On:29-Nov-2022
- Replies:1
Short Answer
No, Tax-free Savings Account or TFSA, Canada is neither a savings account nor a trading account. It is rather an investment account.
Detailed Answer
What is TFSA?
Tax Free Savings Account is one of the registered investment accounts in Canada. The income returns and capital growth within this account is tax-free. One can invest in cash, shares, bonds, ETFs, GICs mutual funds etc., within a TFSA. The variety of financial instruments depends on the service provider you opt for.
You must be 18 years or older to start a TFSA in your name and given its tax advantageous nature. However, you can only contribute up to $6,000 per year into such accounts. You can withdraw any amount at any time from a TFSA.
Is a TFSA a trading account?
Since we have mentioned that you own shares, bonds, ETFs, mutual funds etc., within a TFSA, you might be wondering if it is a trading account.
However, it is neither a savings account as its name suggests nor is it a trading account. It is an investment account where you can park and grow money for your retirement, higher education, parent’s retirement, tour plans etc.
If you treat a TFSA just like your savings bank account and put your money within cash inside a TFSA, the motive of this account will get lost. Cash does not offer any capital growth and its interest rates are comparatively low. Hence, there is no scope for tax savings in such a defensive approach.
If you treat TFSA as a trading account and start buying and selling shares aggressively, then it is deemed that you are carrying a trading business within this account. Your account and income earned will be treated as a business income by the Canadian Revenue Agency (CRA) and such income will get taxed.
It is wise that you treat a TFSA as an investment account and invest your money in a portfolio that has a blend of defensive and growth assets and one that is in line with your risk profile. Invest the money for a long span of time to reap the benefits of compounding in a tax-effective manner.
TFSA and Trading
Given the tax advantageous nature of a Tax-free Savings Account (TFSA), it is fair from the tax agency’s point of view to not allow trading or excessive contributions in the TFSA account.
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Discussion (0)
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