Benefits of Using Your TFSA to Invest in Real Estate

Published On: August 13, 2021Categories: Insights

In the first quarter of 2021, the cost of a single-family home in Canada rose 14.1 percent year-over-year, as reported by Royal LePage. This follows a year of unprecedented demand for homes and month after month of record-setting sales and price appreciation. It could take as long as 24 years for a household earning average income to save up a deposit for a house in Toronto. The housing market does not fair much better in Vancouver, where a family would need to make over $150,000 a year to afford most housing options.

Investors and buyers who jumped into the market early are now sitting on significant profits. The price of an average home in the nation jumped by six percent every year for the past two decades. Combine that rate of return with record-low interest rates and affordable mortgages, and you can understand why so many veteran landlords are multi-millionaires.

Investing In Real Estate Is a Proven Way to Build Wealth

Let’s follow the smart money. You don’t need to adhere to the traditional method of requiring a down payment or mortgage approval to access this lucrative sector. You can use the investments in your TFSA towards a Real Estate Investment Trust (REIT). REITs are registered fund eligible so that you can invest through existing or new TFSA accounts. As a result, you can invest in real estate and contribute to your TFSA, which is a win-win.

REITs are given special tax treatment and are extremely tax efficient. Usually, you can defer paying taxes until you sell your REIT investment, holding more money each year to spend or reinvest.

A private REIT is an outstanding choice if you are looking for a safe, reliable, tax-efficient monthly income.

What is a TFSA?

A Tax-free savings account (TFSA) is a program that started in 2009 that creates a way for individuals 18 years or older to set money aside, tax-free, throughout their lifetime. Even if you did not open a TFSA in 2009, you still accumulated contribution room each year.

To explain it plainly, a TFSA lets you save up money without paying any tax on the growth within the account or on withdrawals. However, it’s estimated that only around half of Canadians have opened a TFSA so let’s find out the advantages.

What are the Advantages of a TFSA? 

Tax-Free Investment Income 

The most significant benefit linked with a TFSA is that Canadians will not get taxed on any investment income they earn. Not only will your investments grow at a tax-free rate, but you will not get taxed on the withdrawal either, unlike an RRSP.

Your Income Does Not impact Contribution Limit  

Another reason why TFSAs are so advantageous for Canadians is that your income does not impact your available contribution limit! Not so with an RRSP, where the amount you can contribute to your RRSP each year is directly related to your income.

Unused TFSA Contribution Room Does Not Expire 

Your contribution room will not expire. If investors don’t max out their TFSA contribution allotment, there is nothing to worry about, the amount you have leftover will carry over to the following year.

An Easy Withdrawal Process 

Withdrawing money from your TFSA is incredibly easy. However, it is not the case for your RRSPs where you must deal with issues like withholding taxes, buying annuities, or opening RRIFs.

When using your TFSA to invest in a REIT, you get exposure to the upside in the equity and leverage. In other words, buying these funds is like hiring a group of professionals to purchase real estate for you. Considering the optimistic state of Canadian real estate, adding a private REIT to your TFSA is a fantastic idea for your future investments.