How to find “tax free” room lying around the house:

By Kaetyn St. Hilaire of ClearWater Private Wealth on September 7th, 2020.

When setting aside savings within your Registered Investment Accounts like a Registered Retirement Savings Plan or Tax-Free Savings Account,

It is only a matter of time before these vehicles are fully maxed. When this happens, there are a few additional options you may consider to continue receiving the benefits of tax efficient growth.  Below is an example of a scenario where some tax-free room might be ‘lying around the house.’ 

Today we will be looking at James. James is age 55, both he and his wife are fully utilizing their Registered Accounts, they have set up an RESP (Registered Education Savings Plan) for their two children,  a 22 year old named Brian and an 18 year old named Justin, who are both living at home. James is expecting to receive a quarterly bonus cheque of $25,000, and currently has zero debt.

Let’s continue…

When queried about which account the $25,000 should be placed, our first question for James would be if he is expecting to withdraw these funds anytime within the next 5 years. A few potential expenditures come to mind. He could be considering a home renovation , perhaps he needs a new vehicle, he may be helping Justin and Brian with their university expenses or saving to assist them with other milestones like their weddings or a down payment on their first homes.  

Let’s pretend that James disclosed that he would be helping his adult children with a down payment on their first homes. In this scenario, I would suggest we open a Tax-Free Savings Account for his sons. Let’s use Brian as an example. At age 22, he is already able to contribute $23,000 into a TFSA of his own. 

Scenario: assume we invested $23,000 in a Tax-Free Savings Account for Brian, with additional contributions of $6,000 per year, grown at 8% for 8 years would leave Brian with a down payment of $106,391 at age 30 (well before the median first time home buying age of 36 for Canadian millennials.) (Note: have a look at our financial calculators here to conduct your own calculations. )

Perhaps you are setting aside funds to help your child with the down payment on a first home, maybe you want to give them an emergency fund they can dip into (and repay with no interest) or perhaps you are looking for more creative retirement strategy. Opening a Tax-Free Savings Account for adult children is an excellent way to introduce them to investing and wealth management. It is also a great way for you to invest funds that might be gifted to them eventually.

Another financial planning strategy is gifting assets to an adult child for use in a Registered Retirement Savings Plan. This would allow them to utilize the First Time Home Buyers Plan, assuming the adult child has earned income and is in a high enough tax bracket to take advantage of the tax deduction generated by the RRSP contribution. An added bonus would be to take the tax return and deposit the funds into a Tax-Free Savings Account.)

Continuing the last scenario: Brian is now 30 years old, has just placed a down payment on his first home. Let’s assume Brian is now married, his wife (age 30) who has never invested or saved before will have an empty TFSA , with contribution room of $77,000. Brain will have an empty TFSA with $112,391 in contribution room next year (assuming an additional $6,000 per year in contribution room).

Having utilized his Tax- Free Savings Account room from an early age, he has grown the “tax free room” by growing the investments inside the Tax-Free Savings Account. Remember: once you have that room, it does not go away when you withdraw those funds (it comes back next year.)

One final scenario: Assuming Brain and his wife are now 30, cash poor and making payments on their first home. If Brain and his wife were to continue saving $6,000 each year into each of their Tax Free Savings Accounts, grown at 8% for 25 years, would accumulate to $877,271 in a tax free portfolio for the couple at age 55, (the same age James is now) with an additional $189,000 in room they built up before the age of 30 but never recontributed.


Going back to the original scenario with James, he was struggling to find a way to invest $25,000 in a tax efficient manner. This strategy outlines a potential way to save a million dollars in an account tax free. The only caveat, its going to be for his son.

Perhaps funding an adult children’s Tax Free Savings Account for use on things such as a down payment on a home, could be a different way to give them a head start on life, as opposed to the more traditional way of directly giving them a down payment for their first home. 

More importantly, it seems that most parents want their kids to be more “well off” than they are. This strategy would give them an opportunity to be in a better position later in life, swimming in tax free room. 

(We do recommend you consult a financial advisor that can develop a custom financial plan before taking on any financial planning strategies.)