How to Leverage a TFSA to Effectively Double Your Contribution 

A Tax-Free Savings Account (TFSA) has a cumulative contribution limit of $109,000 if you turned 18 in 2009. Any TFSA withdrawals are added back to your contribution on January 1 of the following year. However, you can double your contribution without using your working income. This is where the TFSA’s benefit of tax-free investment growth feature comes into play.

How to leverage a TFSA to double your contribution

You can earn from your investments through interest, dividends, and capital gains. All three of them are taxable in different ways. However, in a TFSA, all three are tax-free. So, you can sell your stock for a capital gain and buy another stock from that gain tax-free. You can use the dividend payout to buy another stock without having to pay any tax.

The TFSA allows you to invest in US stocks trading on the NASDAQ and NYSE. However, the US charges a withholding tax on dividend income, and that tax applies even if you buy US stocks from a TFSA. Under the US-Canada tax treaty, a tax paid in the US can be claimed as a foreign tax credit on your Canadian income tax to avoid paying double tax on the same income. Since you pay no tax on TFSA dividends in Canada, you cannot claim a foreign tax credit for the tax withheld by the US Internal Revenue Service.

Hence, it is better to invest in US growth stocks as capital gains on the sale of these stocks are exempt from tax under the TFSA.

You can leverage the TFSA’s tax benefit and double your contribution in two ways.

Dividend reinvestment plan

Manulife Financial (TSX:MFC) is one of Canada’s largest insurers with a global presence in insurance and wealth management. The growing global risks have stirred demand for insurance. Moreover, it is expanding through acquisitions and local joint ventures. Its first quarter 2026 net income surged 149% year-over-year, driven by new business Contractual Service Margin (CSM) from Asia and the United States.

The insurer saw high outflow from its global wealth and asset management business, which pulled the stock down 6% after earnings release on May 14. Now is a good time to buy the stock and lock in 3.75% dividend yield. The insurer has sufficient flexibility to retain its current dividend and even grow it by 10% as it has been doing for the last 12 out of 13 years.

Manulife Financial is among the few stocks that offer both a high dividend growth rate and a dividend reinvestment plan (DRIP). The DRIP automatically buys more income-generating shares from the dividend money, thereby compounding returns. Since TFSA income is tax-free, the dividend tax on DRIP is exempt.

For instance, a $10,000 investment can buy 193 shares at the current market price of $52 and earn you $374 in annual dividends. This dividend amount will buy more shares of Manulife, thereby increasing your TFSA contribution by $374.

Portfolio rebalancing within a TFSA

Many DRIP stocks are letting go of the reinvestment option amidst pressure on free cash flow. Another way to grow your TFSA contribution is by the timely booking of profits from growth stocks and allocating them to the same stock when it falls, or buying other high-growth stocks.

Shopify (TSX:SHOP) is a perfect stock for TFSA rebalancing. You can buy the stock during the seasonal dip from March to May. However, you can expect a 3050% jump in the share price in the November-December period. If you invest $10,000 today and it becomes $13,000 by November, you can book profits by selling shares worth $3,000 and buy another stock for wealth creation or passive income.

Your original $10,000 stays invested in Shopify and reaps the benefit of future growth, while the profit booking increases your TFSA contribution by $3,000.

The post How to Leverage a TFSA to Effectively Double Your Contribution  appeared first on The Motley Fool Canada.

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More reading

• How to Structure a TFSA With $14,000 for Lifelong Monthly Income 
• 5 TSX Dividend Stocks Yielding 3% to 5% for Steady Cash Flow
• Missed Shopify? Here’s 1 TSX Stock With Similar Asymmetry
• 1 Canadian Stock for Growth, 1 for Value, and 1 for Dividends — All Worth Buying Now
• What the Average Canadian TFSA Balance Looks Like at Age 50

Fool contributor Puja Tayal has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Shopify. The Motley Fool has a disclosure policy.