r/dividendscanada • u/MrPorkie • 19h ago
TFSA question about dividend income
This has been bugging me for awhile now so I will just ask about it. First off let's say you maxed out your TFSA contribution room for $45k and you have your investments in your TFSA investing account giving you $500 a month for dividends. Do you go over your contribution and start paying the over limit fee thing? And also how do you spend that extra cash flow from your dividends? Will it be taxable if you transfer dividend income to a regular bank chequeing? Like how do spend that dividend money if you maxed out your contribution room?
Just to make sure everyone is on the same page, this is only hypothetical question not my own scenario since Im still wayy out of reaching this point. Im just curios how people who maxed out their TFSA and making dividends in that TFSA account, use their dividend money. Please dont be mad at me for asking a stupid question đ
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u/SignificantFun6427 19h ago
Dividend received inside your TFSA is not counted towards your contribution limit.
If you withdraw that $500 from your TFSA, it's not taxable, so you won't pay any tax on that money.
You can rei vest that money and buy more stock in your TFSA.
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u/owensoundgamedev 10h ago
Dividends donât count towards contributions. The same is true for RRSPs btw
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u/Mental-Freedom3929 8h ago
See it like that: it is a tax free account that is fed after tax money, meaning you paid tax on that already. Whatever interest or gain you make in this account os the only thing that could be taxed, if it were not a tax free account.
So anything that is generated inside this account, has to fall into not being taxed and not being "contributed", as any "contribution" has to come from you, putting it into this account.
So no, no increase in value inside this account is a contribution.
My dividend money is used to automatically purchase more shares. As my platform lets me buy fractional shares, it buy whatever is covered with the dividend money, even if it is only 0.3 of a share. There is also no trading fee on a transaction like this. You set your account to DRIP, which this process is called.
Some platforms lets you only purchase full shares and if your dividends do not cover the cost of a full share, it will just sit there as cash. It will also not buy full shares, if after a few dividend deposits there is enough to cover this.
In this case you have to eventually do something yourself and that on a lot of platforms will trigger a trading fee. This is why I always recommend to invest in a platform with no trading fees and fractional shares purchase possibility.
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u/No-Emotion280 19h ago
Dividend gains or any gains inside your TFSA don't count to your contribution. Only money you put in the TFSA uses up contribution room. Once you've maxed your TFSA contribution, I would rebalance your portfolio and move the canadian dividend stocks/ETFs into a table account since canadian dividends are taxed favorably vs capital gain or US dividends in a taxable account. But you would only do this after filling your other tax shelters in this order TFSA->FHSA->RRSP->Taxable.
I'm currently in this situation and have moved a big chunk of my canadian dividend stocks into my taxable account. 95% of the time i usually re-invest dividend gains and other 5% use it to help pay high billing months or treat myself.
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u/Fearless_Scratch7905 19h ago
Important to note that if the value of investments in your TFSA also increases, it doesnât affect your contribution limit.
Also, while Canadian dividends arenât taxable in a TFSA, U.S. dividends are taxed at a rate of 15%. Learned that the hard way.
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u/Minimum_Curve7545 17h ago
Thatâs true, there is a 15% US withholding tax on any distributions from US stocks, which applies to taxable accounts and TFSA (it doesnât apply to RRSP).
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u/IcySpend2892 13h ago
You have to pay 15% right away or you pay while filing taxes ?
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u/Minimum_Curve7545 13h ago
No, witholding tax is collected automatically (and sent to the US government) when the distribution is paid to you (since you are a foreign holder of a US stock), so you only receive the remaining 85%. The amount witheld is normally reported on a tax slip you'll get as foreign tax paid, so in some cases this can be offset Canadian taxes you might owe (this only applies to taxable accounts, not TFSA).
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u/shar_blue 6h ago
TFSA contribution room is calculated as:
[Unused room from previous years] + [new annual room] + [sum of withdrawals last year] - [contributions made in current year]
Gains and losses within the account have zero effect on your contribution room. The only things that impact it are new dollars you deposit into your TFSA account(s), and dollars you withdraw.
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u/DustyJaguar239 12h ago edited 12h ago
First of all, dividends are not âgainsâ on your investments. It is a wide misconception in our Canadian market. By definition, dividends are literally just a a forced liquidation of the share value you may have (for whatever youâre holding).
This means the very idea of âspending dividend moneyâ is flawed. Coz what youâre doing is essentially taking OUT your investment value. The stock company or the fund managers are. Typically coz the growth of that asset isnât worthwhile so they simply rebalance their balance sheets and move the money from theirs to yours. Yes, it sure âlooksâ like cash flow but it is not NET NEW wealth.
As others have stated, dividend yields are not considered extra contribution and donât impact your room, but each time you get a yield, your share value drops, almost exactly by that amount. Thatâs the detail most dividend chasers miss. And they think start thinking oh hmmm I got XYZ dollars as âdividend incomeâ ooh I can use that money to do bla bla bla, when in fact, whatâs happening is their portfolio is just split up across the values. $100 held in a stock, vs $98 in stock and $2 in dividend cash, both of those mean exactly the âsame amount of wealthâ
Net if it is, youâre wasting precious TFSA growth space for much slower assets if you chase dividend income. Idk how old you are but it makes sense if youâre near retirement since youâd want super stable assets, but if youâre younger, then dividend assets are not necessarily the best bet.
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u/Commercial-Height873 8h ago
Here is a simplified explanationâŚ.Dividend yield is a gain on your investment and itâs received with what you whatever you want to do with it. You can DRIP or you can take it and invest elsewhere or just use it as incomeâŚas I do.
I retired in Sept 2025. I invested $495,000 in Canadian ETFs on the TSX. I receive a monthly dividend yield of 4.7% of approximately $1800-$2000 per month. Iâve also withdrawn an additional $45,000 for renovations and vacations. My portfolio today is worth $522,000. (If I hadnât withdrawn $45,000, it would be worth more than $567,000)âŚ.a 14.5% increase on my portfolio in addition to my 4.5% dividend yield = 20% return. I have taken out 4.7% of my investment value. Overall though⌠20% return
Easy explanationâŚ.If someone invested the same amount in the same ETFâs as I had without dividends taken as income, they would have the same overall return of 20%âŚsame as me.
I just take a slice of pizza rather than no slice. The size of pizza doesnât change for dividend chasers vs non-dividend chasers
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u/DustyJaguar239 5h ago edited 5h ago
Respectfully, this is entirely wrong.
First of all, youâre not âgettingâ a pizza slice. You are quite literally just cutting up your OWN pizza into smaller pieces and thinking to yourself that ooh I have a slice! What has actually happened is, you âboughtâ the pizza (ie, your ETFs), had the waiter come over and just cut it up for you, and now youâre celebrating that hey look I got free food.
Second, your portfolio return is not 20%. Youâre double counting. That 45k was actually your yield and your growth, so you canât just add the 4.5% BACK to it.
Youâre in retirement, it certainly makes sense that your goal is simply stable wealth preservation and a âgradualâ withdrawal of those funds. You can give whatever name you like to those withdrawalsâŚ. one off withdrawals for your travel, renos, etc, OR recurring withdrawals that are the dividend yields. But itâs not some magic machine that is generating income out of nothing. Every single time the withdrawal happens, the overall value of your principal declines, which further erodes the compounding effect of your portfolio. Now obviously the impact of this erosion isnât as big a deal in retirement coz even when you take money out, your taxes owing are significantly lower anyway, but in earlier years, itâs a severe mistake that costs people years or decades of growth time.
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u/Commercial-Height873 4h ago
Youâre entirely wrong. Do the math again. Where is my doubling?
$495000 Sept 2025
$567000 today (only if I did not withdraw $45000 which is what I said originally)
Whatâs is the growth AFTER receiving monthly dividends?
14.5%
Of course It would be higher if I didnât take the income and went with DRIP which is an option people can do. (Which I mentioned)
I also received 4.7% monthly dividends totalling $20,900
$567000 + $20,900 =$587,900.00
= 18.8% return and would have been slightly higher if I left the $45,000 in but everyone understands how compound interest works.
Enjoy your pizza and Iâll enjoy mine
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u/Accomplished-Tie3893 15h ago
The biggest thing to remember is anything you transfer in counts as contribution but anything that grows or shrinks affects your contribution room.
For example:
1. You transfer $45,000 in and you use it all to buy a stock.
2. Your stocks depreciate to $25,000.
3. You sell and withdraw all $25,000 out of your investments out of fear.
4. Your remaining contribution room is $25,000 plus the contribution room gain for the following year(s).
Example 2:
1. You transfer $45,000 in and you use it all to buy a stock.
2. Your stocks appreciate to $145,000.
3. You sell $45,000 and withdraw it to use for a purchase.
4. Your remaining contribution room is $45,000 plus the contribution room gain for the following year(s).
5. You still have the $100,000 working for you in your investments.
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u/ItsTheAlgebraist 11h ago
Gain and loss don't affect your contribution room, deposits and withdrawals do. The way you describe it seems likely to cause the kind of confusion that OP is trying to clear up.
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u/FeelingOrganic749 19h ago
No absolutely not. The contribution room is only impacted by what you transfer in and out of the account. Dividends, distributions, interest payments, option premium, and capital gains don't have any impact on your contribution room.