While more than one-third of Canadians have opened a tax-free savings account, a survey by Leger Marketing found nearly 40 per cent don't know about investment options within a TFSA.

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While tax-free savings accounts have proven to be a popular investment vehicle, a survey shows many Canadians are confused about them. ((iStock))

The investment vehicle was introduced by the Conservative government in 2008 and allows Canadians over 18 to invest up to $5,000 per year tax-free into a savings account.

However, the program has been largely misunderstood since its inception.

Earlier this year, the Canada Revenue Agency took the unusual step of allowing account holders to explain how and why they misinterpreted the rules. Based on those answers, the agency waived fees for some who had made mistakes in how they handled their accounts.

The Leger survey, paid for by the Bank of Montreal, found that more than one-third of Canadians were not aware of which investment vehicles they could buy with their tax-free savings.

'We are seeing some confusion among Canadians when it comes to how to make the most of out a TFSA.'—David Heatherly, Bank of Montreal

"We are seeing some confusion among Canadians when it comes to how to make the most of out a TFSA," said David Heatherly, vice-president of the Bank of Montreal.

"Much like an RRSP, TFSAs are very flexible investment tools that allow Canadians to tax shelter their investments within a number of investment tools," he said.

According to the survey, only 20 per cent of respondents knew that mutual funds could be bought with TFSAs; 26 per cent knew that GiCs could be included.

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While the survey also showed that almost seven in 10 Canadians considered TFSAs a good investment option, 40 per cent said they had not opened one because they couldn't afford it.

"Investing in a TFSA doesn't have to be a huge financial commitment," said Heatherly, "even a small amount will provide Canadians with the benefits of tax-sheltered savings and tax-free compounding."

While the annual limit for TFSAs is $5,000, unused contribution room from a pervious year can be added the following year. In addition, money that is withdrawn tax-free, can be recontributed the following year without affecting annual contribution limits.