TFSA: Your Complete Guide to the $7,000 Contribution Room in 2025

Give this a read before investing in your TFSA for 2025.

| More on:
Blocks conceptualizing Canada's Tax Free Savings Account

Source: Getty Images

The Tax-Free Savings Account (TFSA) is a unique investment vehicle available to Canadians that allows you to grow your wealth without worrying about taxes.

You can hold a wide variety of investments inside a TFSA, including stocks, funds, bonds, and GICs. Any earnings – whether from interest, dividends, or capital gains – are completely tax-free, and the best part is that withdrawals are also tax-free.

Unlike other registered accounts, there are no restrictions on when or how much you can withdraw, making it an incredibly flexible tool for both short- and long-term goals.

Now, there’s no shortage of articles urging you to invest your new $7,000 TFSA contribution for 2025 – but before diving in, there’s a smarter way to approach it.

For all the perks a TFSA offers, it also comes with some hidden nuances that, if understood, can significantly improve your investment outcomes.

No gimmicks or hacks – just practical insights that may have flown under your radar. Here’s what you need to know before putting that contribution to work.

There’s a 15% withholding tax on U.S. dividends

There’s one small asterisk to the TFSA’s “tax-free status,” and it comes courtesy of Uncle Sam and the IRS.

Suppose you deposit $7,000 into your TFSA, convert it to USD (ouch at today’s exchange rates), and buy the Vanguard S&P 500 ETF (NYSEMKT:VOO).

What you might not know is that you’ll lose 15% of every quarterly dividend VOO pays to you. This is called foreign withholding tax.

Normally, the U.S. imposes a 30% tax on dividends paid by its companies and ETFs to international investors. Thanks to a tax treaty, this rate is reduced to 15% for Canadians.

However, the TFSA isn’t recognized by the U.S. government as a retirement account, so this 15% withholding tax still applies. The only way to avoid it? Hold U.S. stocks and ETFs in your RRSP, which the U.S. does recognize as tax-exempt for dividends.

You can’t claim any capital losses

Suppose you invested in meme stock AMC Entertainment (NYSE:AMC) after falling for the “to the moon” and short squeeze promises made by “ape” investors on Reddit and Twitter.

Now, you’re likely stuck holding a heavy bag. If this happened in a non-registered account, there’s at least a silver lining – you can use the capital loss to offset capital gains and reduce your tax bill.

But if you incurred this loss in a TFSA, you’re out of luck. You can’t claim a capital loss inside a TFSA. The tax-free nature of the account works both ways –whether you win or lose. Worse, the contribution room you used for that investment is gone forever.

So, be smart with your limited TFSA room. Avoid speculative meme stocks like AMC, penny stocks, or options trading. Instead, stick to broadly diversified ETFs and high-quality blue-chip stocks for steady, reliable growth.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Tony Dong 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.

More on Stocks for Beginners

jar with coins and plant
Dividend Stocks

1 Incredibly Cheap Canadian Dividend-Growth Stock to Buy Now and Hold for Decades

Finding an undervalued stock is great, sure. But when it's in this high-growth area with a dividend, it's perfection!

Read more »

Skiier goes down the mountain on a sunny day
Tech Stocks

Meet the Canadian Stock That Continues to Crush the Market 

It's normal to beat the market once or twice while riding a trend. But this stock has been crushing the…

Read more »

Hourglass and stock price chart
Tech Stocks

2 Brilliant Growth Stocks to Buy Now and Hold for the Long Term

Growth stocks are amazing, but only when they have a true growth outlook. Luckily, these two match right up.

Read more »

Tech Stocks

Why I’m Bearish on Celestica Stock, and What I’m Buying Instead

Celestica stock has exploded in share price, but the future doesn't look as certain. So why not consider this stock…

Read more »

A doctor takes a patient's blood pressure in a clinical office.
Stocks for Beginners

This Healthcare Stock Could Be the Best Investment of the Decade

Healthcare will always be around. But tech is just beginning. Why not mix them both together?

Read more »

A plant grows from coins.
Dividend Stocks

2 High-Dividend TSX Stocks to Buy for Increasing Payouts

Let's grab some high growth and solid dividends with these two top TSX stocks.

Read more »

Income and growth financial chart
Stocks for Beginners

These 2 TSX Stocks Are Set to Soar in 2025 and Beyond

Consistently growing demand for their products and services could help these two TSX stocks rally in the coming years.

Read more »

The TFSA is a powerful savings vehicle for Canadians who are saving for retirement.
Dividend Stocks

3 Canadian ETFs to Buy and Hold Forever in Your TFSA

These three ETFs are some of the top choices for a TFSA, so let's get started.

Read more »