Paying less tax means keeping more of your investment gains. One of the most effective ways to do that in Canada is by using registered accounts such as the Tax-Free Savings Account (TFSA) and the Registered Retirement Savings Plan (RRSP). New or younger investors often start with a TFSA because contribution room is not tied to annual income. That means you can open and contribute to a TFSA even in years when you earn little or nothing.
A TFSA can hold many types of investments—it’s not just a place to hold cash. Below we explain why a TFSA is valuable, what investments are eligible, and why exchange-traded funds (ETFs), including all-in-one ETFs, are popular choices for TFSA accounts.
The TFSA’s superpower: tax-free investment growth
The defining feature of a TFSA is that any money you contribute and any income earned inside the account—interest, dividends and capital gains—are permanently tax-free. For example, if you invest $10,000 in an ETF inside your TFSA and it grows to $22,000 over 10 years (roughly an 8% annual return), the $12,000 gain is tax-free.
TFSA contribution limits are set annually and indexed to inflation. In 2023 the annual limit was $6,500. When the TFSA was introduced in 2009, the limit was $5,000 and it has risen over time, including a higher limit in 2015. Contribution room starts accumulating the year you turn 18, even if you haven’t opened an account yet. Your available TFSA contribution room equals:
- The current year’s limit
- Any unused contribution room carried forward from prior years
- Withdrawals made in the previous year
If you have been a Canadian resident since 2009 and never contributed, your cumulative TFSA room can be substantial. To open a TFSA you must be at least 18, have a valid Social Insurance Number (SIN) and be a resident of Canada for tax purposes.
Withdrawals from a TFSA restore contribution room, but re-contributions count against your limit only in the following year. Over-contributions are subject to a penalty tax of 1% per month on the excess amount until corrected, so monitor your contribution room carefully.
What investments can you hold in a TFSA?
A TFSA accepts the same qualifying investments as an RRSP. Typical eligible holdings include:
- Mutual funds: Professionally managed pools of stocks, bonds or other assets that generate interest, dividends or capital gains.
- Exchange-traded funds (ETFs): Funds that track a portfolio of securities and trade on exchanges. ETFs often provide diversification and can be more cost-efficient than comparable mutual funds.
- Individual stocks: Holding shares of companies can produce dividends or capital gains. Note that capital losses in a TFSA cannot be claimed against gains in non-registered accounts.
- Bonds: Government or corporate bonds pay a fixed rate of interest and return principal at maturity, offering interest income and potential capital gains.
- Guaranteed Investment Certificates (GICs): GICs guarantee a fixed return over a set term.
- Cash and cash equivalents: Savings accounts, money market funds and other short-term cash instruments.
Why consider ETFs for your TFSA?
ETFs have grown in popularity among Canadian investors, especially those starting out, because they combine diversification, low fees and easy tradability. Key benefits include:
- Diversification: Most ETFs hold many securities across various industries, regions and asset classes, reducing risk by avoiding dependence on any single holding.
- Lower fees: Passive index-tracking ETFs often have very low management expense ratios (MERs), sometimes under 0.1%, making them cheaper than many mutual funds.
- Professional management: ETFs are managed by investment teams, which saves individual investors time on research and portfolio maintenance.
- Ease of trading: ETFs are bought and sold through brokerage accounts like stocks, making it simple to build a diversified portfolio or to hold multi-asset ETFs for a low-maintenance approach.
What is an all-in-one ETF?
All-in-one ETFs bundle multiple asset classes inside a single fund, providing instant diversification and simplifying portfolio construction. They are particularly attractive for new investors who want broad exposure without managing multiple funds. Below are example all-in-one ETF allocations from Fidelity, shown for illustration:
| Fidelity All-in-One ETFs | Conservative | Balanced | Growth | Equity |
|---|---|---|---|---|
| Ticker | FCNS | FBAL | FGRO | FEQT |
| Equity | 40% | 59% | 82% | 97% |
| Fixed income | 59% | 39% | 15% | 0% |
| Crypto | 1% | 2% | 3% | 3% |
Source: Fidelity Investments Canada ULC
Combining the tax-free growth of a TFSA with the low fees and diversification of ETFs—especially all-in-one ETFs—can help accelerate long-term compounding for new and young investors while keeping portfolio maintenance simple.
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Important information from Fidelity Investments Canada ULC
Investing in ETFs may involve commissions, trailing commissions, management fees, brokerage fees and other expenses. ETFs are not guaranteed; their values change frequently and investors may experience gains or losses. Past performance is not a reliable indicator of future results.
The Fidelity All-in-One ETFs do not charge a direct management fee, but they invest in underlying Fidelity ETFs that do. Based on those weightings, estimated effective indirect management and administration fees are approximately 0.35% for the Conservative ETF, 0.36% for the Balanced ETF, 0.38% for the Growth ETF and 0.39% for the Equity ETF. Actual fees may be higher or lower depending on performance, rebalancing and changes to underlying allocations, and will be reflected in the funds’ MERs.
Each Fidelity All-in-One ETF includes a small allocation to a Fidelity Bitcoin ETF (between 1% and 3%). Portfolios that deviate from their neutral mix by more than 5% may be rebalanced. Statements here are based on information believed to be reliable but are for informational purposes only. This is not investment, tax or legal advice, nor an offer to buy or sell securities. Investors should evaluate their own objectives and risk tolerance before acting.
Portions © 2023 Fidelity Investments Canada ULC. Fidelity Investments is a registered trademark of Fidelity Investments Canada ULC. The presenter is not registered with any securities commission and cannot provide securities advice.