What Is a Tax Free Savings Account? What You Need to Know

Back in 2009, the Canadian government launched a new type of registered account called a Tax-Free Savings Account, or TFSA. Slightly confusingly, a TFSA can be a tax-sheltered regular old savings account or a self-directed investment account.

What is a Tax Free Savings Account

A TFSA allows for the growth of your money completely tax-free in two ways. Firstly, the gains made in a TFSA (interest, or capital gains from investments) are not taxed. Secondly, when you withdraw monies from your TFSA there is zero income tax payable on those amounts.

This is in contrast with something like an RRSP (Registered Retirement Savings Plan) where only the growth is completely tax-free and you pay income tax appropriately on the withdrawals.

Who Qualifies For a TFSA?

You need to be over 18-years old, have a valid Social Insurance Number, and be a Canadian tax resident to open a TFSA account. Note: if you cease to be a Canadian tax resident, you can still keep the account open (if your financial institution lets you) but you lose your right to make new contributions.

How Does a TFSA Work?

Every year, the CRA publishes a contribution limit for a TFSA. Currently, you can contribute $6000 per tax year into the total of all your TFSA accounts (you can have more than one. For example, if you want to mix and match savings and investment accounts). This number rises every few years to try and keep contribution room aligned with inflation.

If you’ve never opened a TFSA, the CRA will do you a solid and give you all the contribution room you missed out on from 2009 onwards! 

2009$5,000.00
2010$5,000.00
2011$5,000.00
2012$5,000.00
2013$5,500.00
2014$5,500.00
2015$10,000.00*
2016$5,500.00
2017$5,500.00
2018$5,500.00
2019$6,000.00
2020$6,000.00
2021$6,000.00
Total contribution room (2021)$75,500.00
TFSA Limits 2021 Source: Canada.ca. * 2010 had a special limit

The good news is when you remove money from your TFSA, you get the corresponding amount of contribution room back. Let’s say you have $50,000 in your TFSA in 2020. You would still have $19,500 of contribution left. But if you were to remove $30,000, you could wait until the next year and then recontribute that $30,000 (plus whatever next year’s allowance is).

Tax Advantages of Tax Free Savings Accounts

All the money that grows inside the TFSA is tax-free. Whether you make investment gains from buying and selling stocks, interest, or dividends, none of it is taxable at all. What’s more, when you remove that money from your TFSA it’s still not taxable. 

Keeping Track of Your TFSA

Because your contribution grows annually and removing money from your TFSA opens up more contribution room the year after you do that, keeping track can be tricky. Luckily, the CRA’s My Account portal does it for you.

What Happens If I Over-contribute?

Over-contribution results in a penalty from the Canada Revenue Agency of 1% of the value of your holdings per month, so needs to be avoided.

Correction of the over-contribution and a letter to the CRA can often resolve the matter.

Can I Have More Than One TFSA?

Yes! For example, you can have a TFSA savings account and a TFSA self-directed investment account. Just be sure to track your contributions so the sum of them does not exceed your annual limit and lifetime limits.

What Can You Use a TFSA For?

Well, pretty much anything you like! Saving for a car, a vacation, a house downpayment, even retirement (although read our tips on saving for retirement first to make sure it’s the best vehicle for you).


The content on this site is for informational and educational purposes only and is not intended as a substitute for professional financial advice. Always consult with a licensed financial or tax advisor before making any decisions based on the information you read on this blog.

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