What Is a Tax-Free Savings Account (TFSA)?

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What Is a Tax-Free Savings Account (TFSA)?

What Is a Tax-Free Savings Account?

A tax-free savings account (TFSA) is a kind of savings account in Canada in which deposits, interest received, dividends, and capital gains are tax-free. Its withdrawals are likewise tax-free.

The money put in TFSAs is an after-tax contribution, which means it was previously taxed. As a result, it has no effect on taxable income.

While it is considered a savings account, a TFSA may store both cash and assets like as mutual funds, stocks, and bonds. This account is open to Canadians aged 18 and over and may be used for any purpose.

Key Takeaways

  • Tax-free savings accounts are a form of tax-advantaged account that may be opened by Canadian citizens aged 18 and over.
  • Because the profits on investments in the account are not taxed and withdrawals are tax free, TFSAs allow you to save money on taxes.
  • Contribution space is the yearly contribution limit for TFSAs.
  • Contributions less than the yearly maximum leave a carryover amount that may be added to the authorized contribution for the following year.
  • Carryovers are retroactive to 2009, the year TFSAs were introduced.

How Tax-Free Savings Accounts Work

In Canada, tax-free savings accounts were established in 2009. They were designed to assist Canadians in saving and investing their money throughout their lifetimes.

The TFSA account allows consumers to save money for any purpose, not just retirement. You may, for example, save for a vehicle, an education, a house, additional living costs, and/or retirement. Furthermore, you are not need to have earned revenue in order to donate.

While there are certain exceptions, money gained through TFSA investments is typically not taxed. Furthermore, savers retain control over their TFSAs. They are free to make contributions, choose investments, and withdraw cash anytime they choose.

When they were initially launched, they allowed Canadians aged 18 and above to make an after-tax contribution of up to C$5,000 each year. That yearly cap was raised to C$5,500 in 2013 and stayed there until 2018, with the exception of 2015, when it was briefly raised to C$10,000. The contribution maximum was established at C$6,000 in 2019 and will stay the same in 2022.


Your “contribution space” refers to the maximum amount you may put into a TFSA. Importantly, you accumulate contribution room for every year since 2009 that you were 18 or older and a resident of Canada, even if you did not have an account open.

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Unused donation space may be carried forward. For example, if you contributed the maximum amount each year until 2019, when you only contributed C$3,000 of the allocated C$6,000 contribution capacity, you might contribute the C$3,000 carryover in 2020. This would have been in addition to the yearly contribution maximum of C$6,000 for 2020, for a total commitment of C$9,000.

Similarly, if you had not contributed since 2016, your 2020 contribution capacity for the TFSA account would have been C$23,000: C$5,500 for each of the years 2017 and 2018 (C$11,000) and C$6,000 each for 2019 and 2020 (C$12,000).

The TFSA yearly space limit is inflation-adjusted and rounded to the closest $500. Furthermore, “qualified transfers, exempt contributions, and defined payouts are not included in the computation of contribution room,” according to the Canadian Revenue Agency.


Any TFSA contribution that exceeds the maximum authorized amount is termed an over-contribution. The Canada Revenue Agency (CRA) will assess a 1% monthly tax penalty on the excess contribution until it is withdrawn.

Account holders should be aware that any funds taken throughout the year do not affect the amount already donated. If you give more money because you believe your withdrawal lowered your already-contributed amount, you may over-contribute and incur tax on that amount.

Taxes may also be imposed for other reasons, such as contributions made by non-residents and banned or non-qualified investments obtained by the account.

TFSA Withdrawals

Withdrawal amounts increase your contribution space, but only in the year of the withdrawal. They are counted at the start of the next year.

For example, if Jane contributed C$5,500 in tax year 2020, with a contribution ceiling of C$6,000, she would have C$500 in contribution capacity for that year. If she withdrew C$2,000, she couldn’t replenish the whole amount in the same year since her allocated contribution space was just C$500.

Jane may give an extra $C500 in this scenario (the amount allowed by the remaining available contribution room in 2020).Then, at the start of 2021, she may add her 2020 withdrawal amount to her contribution room for 2021.

Carryover Contribution and Withdrawal Calculation Example
TFSA contribution room in Jan. 2021$6,000
Less 2021 contribution$1,000
Remaining 2021 contribution room=$5,000
TFSA contribution room in Jan. 2022$6,000
Plus 2021 carryover contribution room+$5,000
Plus a 2021 withdrawal+$1,500
Total 2022 TFSA contribution room=$12,500

TFSA Contribution Room Amounts

Even if you haven’t started a TFSA, your contribution capacity grows each year. Earnings and account value changes have no effect on contribution room.

  Effective Tax Rate Definition

Since 2009, the yearly restrictions in Canadian dollars have been:

2009-2012: $5,000

2013-2014: $5,500


2016-2018: $5,500

2019-2022: $6,000

Types of Investments Permitted

According to the Canadian government, the following sorts of investments are permissible in aTFSA:

Consult a financial counselor or investment professional to ensure that the investments you want to buy are compatible with the possibilities available.

Pros and Cons of TFSAs


  • Everything you make in your account increases without being reduced by taxes. Furthermore, all withdrawals are tax-free.
  • Contributing to a TFSA does not need earned money.
  • Unused contribution space is carried over to future years, allowing you to give more.
  • Carryover is retroactive to 2009 or when you turned 18. (if after 2009).
  • There are no mandatory withdrawals; withdraw any amount at any time without penalty.
  • The money you make in aTFSA or the amount you remove from it have no effect on government program benefits.


  • Donations are not tax deductible.
  • Contributions that exceed the account’s contribution space are taxed while they are in the account.
  • Contributions made while you are a non-resident of Canada are taxed for the duration of the account’s existence.
  • If taxes are due, a TFSA return must be submitted by June 30 of the year after the taxable event.
  • TFSA savings are not immune from creditors.

The revenue generated by your TFSA assets has no effect on your contribution capacity for current or future years.

How to Open a TFSA

ATFSA may be opened by anybody who is a Canadian resident, 18 or older, and has a valid Social Insurance number. You may also have more than one TFSA at a time, but the total amount you contribute to all of your TFSAs cannot exceed your authorized TFSA contribution capacity for that year.

To start saving with aTFSA:

  • Seek for financial firms that provide TFSAs (types include deposit, annuity, trust arrangement, and self-directed TFSA).
  • Create an account. Your Social Insurance number, date of birth, and acceptable identification will be required.
  • Once your account has been authorized and opened, the financial institution will register it with the Canadian Revenue Agency as a qualified arrangement.
  • Start funding your TFSA.
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*If you are not a Canadian resident, you may create a TFSA; however, any contributions made while a non-resident will be taxed at 1% per month until the account is closed.


A registered retirement savings plan (RRSP) account is only for retirement savings, but a TFSA account may be used to save for anything. In addition, a tax-free savings account varies from a registered retirement account in two important ways:

  1. RRSP contributions are deducted from your taxable income. TFSA contributions are not tax deductible.
  2. Retirement plan withdrawals are taxed as income. Withdrawals from a TFSA are tax-free.

How Does the Tax Advantage of a TFSA Compare to a Regular Investment Account?

Consider Joe and Jane, two savers. Joe invests $6,000 in a 7%-a-year investing account at the start of the year. Jane contributes the same amount, but to a 7% TFSA. They will both have C$6,420 after a year, but Jane may take all of it and pay no taxes on it, but Joe will be taxed on the C$420 profits.

Are Contributions to a TFSA Tax Deductible?

No. Contributions are made using money that has already been taxed. As a result, they are not deductible from the outset and cannot be used to decrease your taxable income. With a few exceptions, however, all withdrawals from a TFSA are totally tax-free.

What Is the Early Withdrawal Penalty for TFSAs?

There is no penalty for withdrawing funds from a TFSA. That is one of its benefits. The Canadian government intended for this form of savings account to be utilized for anything, not only retirement. As a result, you may make withdrawals at any moment throughout your life without being punished.

The Bottom Line

Tax-Free Savings Accounts are an excellent way to save and invest for whatever reason you choose. Balances in accounts grow tax-free. Withdrawals are also tax-free. You may also withdraw funds whenever you want.

Account users may also roll over unused amounts of their contribution allowance to consecutive years with TFSAs. Furthermore, withdrawals may be added back to the account the following year. This increases the allowable contribution amount, allowing a person even more opportunities to grow the value of their account over time.

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