TFSA Investment Options: What You Can Hold and How It's Taxed

A Tax-Free Savings Account (TFSA) can hold both cash and investments: deposits such as GICs, most shares, ETFs and REITs that trade on a designated stock exchange, mutual and segregated funds, and some bonds and other debt. Interest, dividends and capital gains earned in a TFSA are generally tax-free, even when you make a withdrawal. Investments held in a TFSA can still lose money. Some investments aren’t permitted, and holding one is taxed: see what a TFSA can’t hold. The rest of the TFSA guides are on the TFSA hub.

What investments can a TFSA hold?

A TFSA set up as a trust can only hold what the CRA calls qualified investments, which it lists as:

• cash, GICs and other deposits;
• most shares, warrants and options, ETF units and REIT units that trade on a designated stock exchange;
• mutual funds and segregated funds;
• savings bonds issued by Canada or a province;
• bonds and other debt of a corporation listed on a designated stock exchange, and debt rated investment grade;
• insured mortgages.

Designated stock exchanges are the ones the Minister of Finance has designated, and Finance Canada publishes the list. Money counts whether it is in Canadian or foreign currency, as long as its fair market value doesn’t exceed its stated value as legal tender.

There are three main types of TFSA: a deposit TFSA at a bank or credit union, which works like a savings account or GIC; an annuity contract with an insurance company; and an arrangement in trust. Features and risk differ from one type to another. In a self-directed TFSA you choose and trade the qualified investments yourself, such as stocks, bonds, funds and ETFs. Your provider may also offer fewer choices than the rules allow: the CRA notes that many firms restrict what their registered plans can hold.

Savings TFSA or investments: how the holdings differ

If you meant a TFSA against a regular savings account outside it, see TFSA vs a non-registered account. Inside a TFSA, the choice is between leaving the money in deposits and investing it:

Access differs too: longer-term GICs may limit access to your money or charge penalties if you withdraw before the term ends, while mutual funds can generally be bought and sold at any time. Taking money out of the TFSA itself follows the TFSA withdrawal rules.

The Canada Deposit Insurance Corporation (CDIC) insures eligible deposits at its member institutions if one fails, up to $100,000 per coverage category, principal and interest included, so deposits in more than one category can be covered for more in total. In a TFSA that protects eligible deposits such as savings accounts and GICs, but not mutual funds, stocks, bonds or ETFs. Best TFSA accounts compares providers, and TFSA GICs covers holding a GIC.

What decides the choice. The Financial Consumer Agency of Canada lists the things to weigh: your risk tolerance, your investment goals and your timeline. It groups savings accounts, short-term deposits, short-term GICs and cashable savings bonds as short-term options, and bonds, mutual funds, stocks and long-term GICs as longer-term ones. More risk may be acceptable for a longer-term goal because there is more time to recover any losses. Costs differ by investment type and can affect your return.

The tax shelter applies whichever you choose: interest, dividends and capital gains are generally tax-free in a TFSA. For specific products, the ETF, GIC and stock guides explain each kind, asset location covers which account to hold what in, and the TFSA calculator projects growth at a rate you choose.

What can’t a TFSA hold? Non-qualified and prohibited investments

The CRA groups the problem holdings as non-permitted investments: those that are prohibited, those that are non-qualified, and those that come with an advantage.

Non-qualified investments. Any investment not on the CRA’s list of qualified investments is non-qualified. Examples from the CRA’s folio on qualified investments: cryptocurrencies such as bitcoins; rare coins and other money held for its collectible value; futures and other derivatives where your risk of loss may exceed your cost; and securities traded on over-the-counter markets, which generally don’t qualify unless they are cross-listed on a designated stock exchange or meet other conditions. Some private-company shares can qualify: a share of a specified small business corporation can be a qualified investment if it is not a prohibited investment for the plan.

Prohibited investments. A prohibited investment is one closely connected to you, for example an investment in a company in which you have a significant interest (10% or more ownership). It also includes a debt or share of, or an interest in, a person or partnership you don’t deal with at arm’s length. If one is both, the CRA counts it only as prohibited.

The tax. A non-qualified investment is taxed at 50% of its fair market value when the TFSA acquired it or it became non-qualified, and a prohibited investment at 50% of its fair market value. You report it on the TFSA Return (RC243) and pay by June 30 of the year after the year the tax applies. The tax may be refunded if the TFSA disposes of the investment, or it stops being non-qualified or prohibited, before the end of the calendar year after the one it was taxed in (or a later time the Minister of National Revenue allows). There’s no refund when, in the CRA’s words, it is “reasonable to expect the holder knew, or should have known” that the investment was or would become non-qualified or prohibited.

Your provider has to tell you before March of the next year if the TFSA acquired or disposed of a non-qualified investment, or if one of its investments became or stopped being non-qualified. Income a non-qualified investment earns may also face a 100% advantage tax if it isn’t taken out of the account promptly. The TFSA penalty calculator covers the RC243 return for over-contributions.

Can you lose money in a TFSA?

Yes. Every investment comes with a risk, and you may lose money, including if markets decline. Deposit insurance covers eligible deposits such as savings accounts and GICs, not stocks, bonds, mutual funds or ETFs.

A loss doesn’t give you room back. Changes in the value of your TFSA investments don’t affect your contribution room, and losses don’t increase it. If you withdraw what is left, the amount you withdraw is added back as contribution room on January 1 of the next calendar year; TFSA withdrawal rules has the details.

Do you pay tax on interest, dividends and gains in a TFSA?

Generally no: interest, dividends and capital gains earned inside the account aren’t taxed in most cases, even when you take the money out. Contributions aren’t tax deductible. The TFSA guide covers taxes and reporting.

Tax can still apply to non-permitted investments and to income from carrying on a business. US dividends are covered next.

Can you hold US stocks or US dollars in a TFSA?

Yes. Except for certain derivatives, a security listed on a designated stock exchange is a qualified investment, and the New York Stock Exchange and Nasdaq are designated. The Canada-US tax treaty generally limits the tax one country charges on dividends beneficially owned by a resident of the other to 15% of the gross amount. The foreign tax credit is for foreign tax on income you report on your Canadian return, while TFSA income is generally tax-free. US stocks in a TFSA works out what that costs and covers US dollar accounts.

Can you hold crypto in a TFSA?

Not directly: the CRA says cryptocurrencies such as bitcoins are not qualified investments. Except for certain derivatives, a security listed on a designated stock exchange is a qualified investment, and the CRA’s examples include units of exchange-traded funds. Crypto ETFs in Canada covers the crypto funds.

Can you day trade in a TFSA?

You can trade qualified investments in a self-directed TFSA. The risk is how the CRA sees it: holders who invest “with the frequency and experience of a professional trader” may lose the account’s TFSA status and have the income taxed as business income. A TFSA is generally taxable on income it earns from carrying on a business, and you are jointly and severally liable with the TFSA trust for the tax attributable to that business.

Whether trading is a business is a question of fact, decided on your own circumstances, using factors the courts developed; day trading in Canada explains them.

A TFSA trust is also prohibited from borrowing money or other property, and borrowing ends its status as a TFSA from that time. The CRA notes that this makes a short sale in a TFSA effectively prohibited.