TFSA confusion: The myths that just won’t die

I’ve had clients ask if a dividend paid inside their TFSA counts as a contribution. Others think they lose contribution room when they make a withdrawal, or that a TFSA is only for short-term savings. These aren’t outliers; they’re everyday Canadians trying to do the right thing and getting tripped up by the most misunderstood account in the country.

Since its introduction in 2009, the TFSA has become a core part of financial planning. But despite its popularity, misconceptions abound—and they’re costing Canadians real money.

Below are the seven questions I field most frequently, each introduced with an anonymized client situation so you can see how the myth shows up in practice—and how to handle it.

1. “If my TFSA earns dividends or capital gains, do those amounts count as new contributions?”

Client scenario:
Sarah holds $80,000 of the Vanguard All-Equity ETF (VEQT) in her TFSA. In January, she notices a $1,200 cash dividend and emails me: “Did I just use $1,200 of contribution room?”

Answer: No. Investment income from dividends, interest or capital gains has zero impact on your contribution room. The room is created only by government-set annual limits + unused space from past years + withdrawals made in a prior year. Growth inside the TFSA is completely tax-free and does not reduce future contribution capacity. 

2. “I thought the limit was $7,000 this year. How are people contributing $20,000 or $30,000 (or more) in one year?”

Client scenario:
Mike, 35, has never contributed to a TFSA. After selling a rental condo, he wants to deposit $50,000 but worries that it breaks the rules.

Answer: TFSA contribution room is based on your age—you start accumulating it in the year you turn 18. Unused room carries forward forever, and withdrawals made last year return to you on January 1. Someone who was 18 or older in 2009 and has never contributed now has about $102,000 of cumulative room (based on Canada Revenue Agency limits from 2009 to 2025). 

So, large lump sums are perfectly legitimate if you’ve banked the space. Always verify your personal limit by checking your CRA My Account and your own records before making the transfer. (The CRA’s records are not always up to date.)

Assuming you’ve never made a TFSA contribution before and have been an eligible adult all this time, here’s the quick math: 

• 2009–2012 = $20,000
• 2013–2014 = $11,000
• 2015 = $10,000
• 2016–2018 = $16,500
• 2019–2022 = $24,000
• 2023 = $6,500
• 2024–2025 = $14,000
• TOTAL: $102,000

3. “What’s the difference between naming a beneficiary and a successor holder?”

Client scenario:
I was prompted to designate a beneficiary or a successor holder for my TFSA. What’s the difference, and in what scenario would I use one versus the other?

Answer: A successor holder can only be your spouse or common-law partner. Should you die, they inherit the account itself. The TFSA stays intact, tax shelter preserved, and it doesn’t eat into their own contribution room.

Anyone can be designated the beneficiary of your account. Upon your death, the TFSA collapses and cash (or in-kind assets) flow directly to the named person. Future growth is taxable unless they have their own TFSA room to recontribute.

Why the two-step plan? While both spouses are alive, successor-holder status keeps the account tax-free. After the first death, redesignating the account to your children or someone else as beneficiaries lets the money bypass probate and be paid out quickly.

If you’ve already set up your TFSA but realize your designations aren’t aligned with this strategy, you can update them at any time by submitting a new beneficiary or successor-holder form through your financial institution.

4. “A TFSA is just a savings account. I can move money in and out whenever I want, can’t I?”

Client scenario:
Natalie treats her TFSA savings account like a giant sinking fund for birthdays, vacations, Christmas presents, new tires, etc. Money is frequently moved in and out and tracking has become a nightmare.

Answer: The word “savings” in TFSA is a misnomer. You can hold stocks, exchange-traded funds (ETFs), mutual funds, bonds and guaranteed investment certificates (GICs). Frequent in-and-out transfers are allowed, but each withdrawal only creates new room on January 1 of the next calendar year. 

Miss that timing (or forget previous re-deposits) and you’ll trigger over-contribution penalties of 1% per month on the excess. Tracking the constant ins and outs is a nightmare and can be particularly troubling if (when) your CRA My Account is not up to date. 

For your short-term “sinking fund” cash, consider a high-interest savings account (HISA) or a no-fee chequing account instead.

5. “My TFSA is untouchable. I should keep contributing even in retirement, right?”

Client scenario:
Jill and Mark, newly retired, hesitate to tap into their $250,000 (combined) TFSAs for a bucket-list trip (or new car, or home reno project, or gift to their adult child), fearing they’ll “wreck the compounding.”

Answer: In retirement, the TFSA is your most flexible tool:

Remember: withdrawals are tax-free and don’t affect means-tested benefits, and the contribution space reappears January 1, letting you shelter more money later.

6. “Can I open a TFSA for my kids or just use my own room for them?”

Client scenario:
A couple’s 14-year-old daughter asks for “an investing account like mom’s TFSA.” Dad wonders if he can contribute on her behalf.

Answer: Only Canadians age 18 and up with a social insurance number (SIN) can own a TFSA. You may give money to an adult child to use in their TFSA; attribution rules don’t apply, so future earnings belong to them. 

Using your TFSA for a child’s portfolio is possible, but it ties up room you might need later and muddies the estate plan—because on your death, the assets first pass through your estate (unless the child is named beneficiary). 

A better strategy: help them open their own TFSA on their 18th birthday and seed it with a starter contribution. Or max out your own TFSA and then consider partial withdrawals at key life stages to help your children.

7. “Should I stash my riskiest ‘moon-shot’ stocks in the TFSA for tax-free growth?”

Client scenario:
Chris wants to load $7,000 of “next NVIDIA” penny stocks into his TFSA, hoping for 10-bagger gains.

Answer: Tax-free gains are wonderful, but losses are permanent. If a speculative pick goes to zero, your original contribution room disappears forever, and you can’t claim a capital loss to offset the misery. 

A calculated risk in a diversified global-equity ETF maximizes long-run after-tax growth without the “all or nothing” downside. Keep the meme stocks (if you must) in a non-registered account where a loss at least gives you a tax deduction.

Two bonus myths—rapid-fire

The bottom line on TFSAs

The tax-free savings account is more powerful and more flexible than most Canadians realize. Understand the mechanics of this wealth-building tool, track contributions diligently and deploy the account strategically. Your future self (and your tax bill) will thank you.

Read more about TFSAs:

• The best TFSAs in Canada
• Retirement planning advice for people who don’t use an advisor
• Is VGRO a good investment? What else should I buy?
• How does a U.S.-dollar TFSA work?
• Best online brokers in Canada for 2025

About Robb Engen, QAFP

Robb Engen is a fee-only advisor who will work with you to achieve your financial goals by creating a financial plan with actionable steps along the way.

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