Tax Free Savings Account (TFSA)

What is a Tax Free Savings Account (TFSA)?

TFSA was created by the Canadian Government in 2009 to help Canadian residents save annual earnings without being taxed on contributions, interest earned or capital gains. The added benefit is withdrawals are tax-free.

The maximum annual contribution room per individual for each calendar year prior to 2013 was $5,000.  As of 2016, the limit has increased to $5,500. Withdrawing funds from your TFSA does not reduce the total amount of contributions you have already made for the year. If you over-contribute and surpass the cap, the Canadian government would tax you 1% equal to the highest excess TFSA amount in the month and for each month that the excess amount remained in your account. One way to avoid over-contributing is to put the amount you withdrew back into your TFSA the next year so that it gets added onto the subsequent year’s contribution limit.

Below is a chart of the annual limits since 2009, when the TFSA was first introduced, and the cumulative total you would have saved to date, if you had maxed out your contribution limit every year since its inception.

Years TFSA Annual Limit Cumulative Total
2009 – 2012 $5000 $20,000
2013 - 2014 $5500 $31,000
2015 $10,000 $41,000
2016 $5500 $46,500

How can a TFSA help you?

Money in a Tax Free Savings Account (TFSA) is tax-exempt as opposed to tax-deferred. It makes sense for just about everyone. The TFSA is ideal for generating savings on big purchases such as a down payment on a home, the purchase of a car, vacations, or a complement/alternative to the RSP. You can have more than one TFSA at any given time, but the total amount you contribute to all your TFSAs cannot be more than your available TFSA contribution room for that year.

The benefits of a TFSA are:

  1. You don’t pay tax on your interest or investment returns. 
  2. Any unused contribution room from previous years accumulates, so if you’ve never contributed to a TFSA your contribution room has been growing steadily since 2009.
  3. Unlike an RSP you don’t have to pay tax when you withdraw money from your TFSA. This means more flexibility moving money from your account.
  4. You can use a TFSA to save for whatever you want, whether your goals are short-term or long-term.
  5. A TFSA is a good place to build an emergency fund. 
  6. Just like in an RSP, your TFSA savings can be held in a savings account, or in investments such as Guaranteed Investment Certificates (GICs).
  7. There is no tax or penalty owed from withdrawing funds from your TFSA
  8. For seniors who worry that investment income could have a negative impact on government benefits or tax credits that are reduced or eliminated at higher income levels. These include Old Age Security (OAS) benefits, the Guaranteed Income Supplement (GIS) and the federal age credit. Withdrawals from a TFSA have no impact on eligibility for these “income-tested” benefits.

Need more help?

We encourage you to contact us, should you have any questions.