Insights & EventsWhat is a Tax-Free Savings Account (TFSA)?February 17, 2023 • 2 MIN READ
What is a Tax-Free Savings Account (TFSA)?
A Tax-Free Savings Account (TFSA) is a registered tax-advantaged savings account that can help you earn money, tax-free.
You can think of a TFSA like a basket, where you can hold qualified investments, that may generate interest, capital gains, and dividends, tax-free.
Whether you’re saving for your dream wedding, a rainy day, your first home, or an extended vacation, a TFSA can help you reach your goals sooner.
Why invest in a TFSA?
Comfort and convenience: A TFSA offers you the flexibility to save for various short-term and long-term goals, usually, with easy access to your money depending on the type of investment you hold.
Tax-free growth and withdrawals: You pay no tax on any investment income you may earn in your TFSA and you can withdraw funds from a TFSA without paying tax. The higher the return potential on your investments, the faster your savings may grow, tax-free.
Not just a savings account: Your TFSA can hold a variety of qualified investments, including cash, stocks, guaranteed investment certificates (GIC’s) and mutual funds.
A flexible way to save: If you withdraw from your TFSA, you don’t permanently lose your contribution room. You can re-contribute amounts you have withdrawn in the following year (or years).
Important Information & FAQ
You can hold qualified investments like cash, stocks, bonds, mutual funds in a TFSA and can withdraw contributions as well as the interest, capital gains, and dividends earned in the account at any time, without paying taxes (or reporting the withdrawals as income when you file your taxes).
Each year, the Government of Canada determines the maximum amount a holder of a TFSA can contribute to it in that year. This limit is known as the contribution limit. The contribution room begins to accumulate every year, if any time beginning in the calendar year a Canadian resident is 18 years and older. If you don’t contribute up to the contribution limit for a given year, this amount is carried forward and is added on to your contribution room for future years.
TFSAs are available to every Canadian resident, who is 18 years of age or older with a valid Social Insurance Number (SIN). To open a TFSA with Verus Financial, you must be of the age of majority in your province of residence.
Eligibility for non-residents of Canada
If you become a non-resident of Canada for tax purposes after opening a TFSA, you can keep your TFSA and will not be taxed in Canada on any earnings in the account or on withdrawals from it.
However, if you make a contribution while you are a non-resident, except certain exceptions, you will be subject to a 1% tax for each month the contribution remains in the account. You may also be liable for other taxes. Further, TFSA contribution room will not accumulate for any year during which you are a non-resident of Canada throughout the entire year.
Whether you’re saving for a big purchase, your first home, or an extended vacation, a Tax-Free Savings Account (TFSA) can help you get there. Once you’ve opened a TFSA, you can contribute at any time and earn interest or returns, tax-free — unlike a non-registered savings account.
How much you can contribute once you’ve opened an account is determined by your contribution room – the maximum amount that you can contribute to TFSAs in any given year. Your contribution room accumulates each year in which you are 18 years of age or older and a resident of Canada, even if you don’t file an income tax return or open a TFSA.
Your contribution room consists of the current year’s contribution limit, any unused contribution room that you have accumulated from previous years and the total value of TFSA withdrawals made in the previous year.
All contributions made during the year to your TFSA, including the re-contribution of withdrawals, count against your contribution room.
How much can I contribute to my TFSA?
The TFSA contribution limit for 2021 is $6,000. You can also carry forward any unused contribution room from previous years. The annual TFSA contribution limits per year, since TFSAs were introduced in 2009, are listed below.
- The annual TFSA dollar limit for the years 2009-2012 was $5,000.
- The annual TFSA dollar limit for the years 2013-2014 was $5,500.
- The annual TFSA dollar limit for the year 2015 was $10,000.
- The annual TFSA dollar limit for the years 2016-2018 was $5,500.
- The annual TFSA dollar limit for the years 2019-2022 was $6,000.
The annual TFSA contribution limit is subject to change by the federal government.
How will I know what my TFSA contribution limit is for each year?
Every year, the government calculates how much TFSA contribution room you have available.
What if I can’t contribute the maximum contribution room amount?
You can-carry forward any uncontributed amounts into future years indefinitely. For 2020, you can contribute up to $6,000 (annual contribution limit for 2020) PLUS any unused contribution room from previous years.
What happens if I over-contribute to my TFSA?
If you contribute more than your contribution limit, you may be subject to a penalty tax of 1% per month based on the highest excess TFSA amount in that month.
Can I contribute to my spouse’s TFSA?
No, you can’t contribute directly to your spouse’s TFSA as you can with a spousal RRSP. However, you can give your spouse money, which they can then contribute to their own TFSA. Any income your spouse earns on the money in their TFSA is theirs and will not be attributed back to you.
When can I withdraw money from my TFSA?
You can withdraw funds from your TFSA any time you want and you don’t have to reach a certain age before you withdraw your money. Withdrawals made from your TFSA will be added back to your TSFA contribution room the following year.
How much can I withdraw from my TFSA?
There is no limit on how much you can withdraw from a TFSA.
Once I’ve withdrawn money from my TFSA, is that contribution room lost?
If you withdraw from your TFSA, you do not permanently lose your contribution room. You can recontribute amounts you have withdrawn in the following year or years and your contribution room carries forward indefinitely.
Do I have to pay income tax on my TFSA withdrawals?
No, you don’t have to pay income tax on the amounts you withdraw. Because TFSA withdrawals don’t count as taxable income, they don’t affect federal income-tested benefits or tax credits you may receive, including the Canada Child Benefit program, the Canada Workers Benefit, the Good and Services Tax / Harmonized Sales Tax (GST/HST) Credit, and the Age Credit.
TFSA withdrawals also won’t reduce benefits based on your income levels, such as Old Age Security, the Guaranteed Income Supplement and Employment Insurance benefits.
What can I spend the money on?
Anything you want. You could wait until you retire and use it to supplement retirement income you may have from pensions, RRSPs or other sources, you can also use it for short-term savings goals like a new car or a vacation, or for needs that arise suddenly like repairs to your home.
A Tax-Free Savings Account (TFSA) offers you the flexibility and convenience of investing in your future while accumulating earnings, tax-free, as you work towards your short-term and long-term financial goals.
Do I Have to Pay Taxes on my TFSA Income?
No. You don’t have to pay taxes on the investment income you earn in a TFSA or on the amounts you withdraw. This can help you build your savings faster.
Do TFSAs Impact My Eligibility for Federal Income-Tested Benefits?
No. TFSA contributions and withdrawals do not impact any federal government assistance programs such as the Canada Child Benefit program or Guaranteed Income Supplement. This means that those who benefit from these programs can continue to use the TFSA to generate tax-free income without affecting their support under these programs.
What Kind of Investments Can I Hold in My TFSA?
You can hold many of the same investments you hold in your RRSP in your TFSA, including:
- Mutual funds
- Exchange Traded Funds (ETFs)
What Happens to My TFSA Assets in The Event of a Marriage Breakdown?
In the event of a breakdown of a marriage or common-law partnership, a transfer can be made from one individual’s TFSA to another individual’s TFSA without implication for either person’s contribution room. The transfer is made by the issuer of the TFSA.
What Happens To My TFSA If I Die?
If the account holder of a TFSA dies, there are two typical scenarios:
- A designated successor holder (spouse or common-law partner) takes over as the holder of the TFSA.
- A designated beneficiary, which can be your estate, receives the distribution from the account.
Your TFSA will continue to grow tax-free if given to a successor holder. Often a successor holder can consolidate the TFSA with their own TFSA for simplicity of management. Or the TFSA can be maintained separately.
You can designate a successor holder and/or a beneficiary when you set up your TFSA with Verus Financial.
TFSAs and RRSPs offer tax advantages that can help you achieve your saving and investing goals. In choosing one over the other, it’s important to understand the differences and the benefits of each type of registered plan.
An RRSP is designed specifically to provide you with income after you retire. Your annual contribution limit is based on your prior year income, subject to certain adjustments and an annual maximum limit. Information on your contribution limit can be found on your prior year notice of assessment. The contributions you make are tax-deductible; withdrawals, on the other hand, are subject to taxation.
A TFSA is not designed specifically for retirement and can help you save money for a wide range of goals. The amount you can contribute is not based on your income and your contributions are not tax-deductible. You can withdraw your money any time you want it, and you don’t pay tax on those withdrawals. You are also able to recontribute amounts withdrawn from your TFSA the following year or subsequent years without impacting your contribution room in those years.