Tax-Free Savings Account (TFSA), introduced by the Federal Government in 2009, allows you to save and invest money without having to pay tax on any of the interest it earns. Withdrawals from your account are also tax-free.
How the TFSA works
Effective January 2019, Canadian residents, age 18 and older, can contribute up to $6,000 annually to a TFSA.
Contribution to a TFSA will not be deductible for income tax purposes but investment income, including capital gains, earned in a TFSA will not be taxed, even when withdrawn.
Unused TFSA contribution room can be carried forward to future years.
The amount withdrawn can be put back in the TFSA at a later date without reducing your contribution room.
Neither income earned in a TFSA nor withdrawals will affect your eligibility for federal income-tested benefits and credits.
Contributions to a spouse’s TFSA will be allowed and TFSA assets can be transferred to a spouse upon death.
What are the benefits?
- Those who cannot contribute $5,000 from 2009 through 2012 will be able to carry forward their unused contribution room to future years, $5,500 from 2013 through 2014, $10,000 for 2015, $5,500 from 2016 through 2018, and $6,000 for 2019 onward.
- If you withdraw for the TFSA the full amount of the withdrawals can be put back into the TFSA in the future.
- Canadians can contribute to their spouse’s or common-law partner’s TFSA, depending on the spouse’s or partner’s available room.
- The TFSA will also provide seniors with a tax-free savings vehicle to meet ongoing savings needs, something they have only limited access to once they reach age 71 and are required to begin drawing down their registered retirement savings.
- There will be no impact on income-tested benefits. Neither income earned in a TFSA nor withdrawals will affect your eligibility for federal income-tested benefits and credits, such as the Guaranteed Income Supplement and Canada Child Tax Benefit.
Maximum Contribution Room Calculation
The maximum contribution limit per year is $6,000.
When you contribute less than the maximum contribution limit, the difference is referred to as "unused contribution room" and is calculated as follows:
Unused contribution room from the prior year, PLUS
Contribution limit for the current year, PLUS
Withdrawals in the previous year
From 2014 until the end of 2019, you contributed the maximum TFSA dollar limit each year. As a result of this $6,000 contribution in 2019, your unused TFSA contribution room at the end of 2019 was zero.
Your TFSA contribution room at the beginning of 2020 was $6,000 (the 2020 TFSA dollar limit). On June 15, 2020, you made a contribution of $500. On October 26, 2020, you withdrew $4,000. Your unused TFSA contribution room at the end of 2020 was $5,500 ($6,000 – $500).
This means you can contribute:
$6,000 (2020 unused contribution room)
$500 (2020 contribution)
$4,000 (2020 withdrawal)
$6,000 (2021 contribution room)
$15,500 2021 contribution limit
Do not over contribute (excess contributions)
An excess contribution occurs when you contribute more than your unused contribution room. You are responsible for ensuring your maximum contribution limit is not exceeded.
How is a TFSA different from a Registered Retirement Savings Plan?
Contributions to an RRSP are deductible and reduce your income for tax purposes. In contrast, your TFSA savings will not be deductible.
Withdrawals from an RRSP are added to your income and taxed at current rates. Your TFSA withdrawals and growth within your account will not – they will be tax-free.