Tax-Free Savings Account

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The Tax-Free Savings Account (TFSA) was introduced in the 2008 Federal Budget[1] and accounts could be opened starting on January 1, 2009.[2] Despite the term "savings" in the name of the account, it can also be used for investment, e.g. for retirement.

A TFSA has the following tax advantages:

  • No tax is levied on income or capital gains inside these accounts.
  • There is no tax deduction available for amounts contributed to a TFSA.
  • There are no taxes due when you withdraw money from a TFSA.

There are a number of similarities with a Registered Retirement Savings Plan (RRSP), but also some key differences. Neither income earned within a TFSA nor withdrawals from it affect eligibility for federal income-tested benefits and credits[2], such as Old Age Security, the Guaranteed Income Supplement and the Canada child benefit.

Understanding how the over-contribution rules for TFSAs work are very important, as the penalty for over-contributing is significant. Over-contributions often result when a withdrawal has been made. Withdrawals from your TFSA in the year will only be added back to your TFSA contribution room at the beginning of the following year. If you decide to replace or re-contribute all or a portion of your withdrawals into your TFSA in the same year, you can only do so if you have available TFSA contribution room. If you re-contribute but do not have contribution room, you will have over-contributed to your TFSA in the year.

By June 2014, approximately 13 million Canadians had opened a TFSA, and financial assets held in TFSAs were worth $132 billion.[4]

History and changes

In 2013, the annual contribution limit was raised for the first time, to $5500.[5]

Budget 2015[6] proposed to increase the TFSA annual contribution limit to $10,000. This increase applied as of January 1, 2015, so that a single annual contribution limit of $10,000 applies to the 2015 and subsequent calendar years. The TFSA annual contribution limit will no longer be indexed to inflation.

In December 2015, the Department of Finance announced returning the Tax-Free Savings Account (TFSA) annual contribution limit to $5,500 from $10,000 effective January 1, 2016, and to reinstate indexation of the annual contribution limit. The TFSA annual contribution limit for 2015 remains $10,000.[7]

Who can contribute to a TFSA?

TFSAs are available to residents 18 years and older who have a valid Canadian social insurance number[8]. The initial maximum contribution limit when the program was introduced was $5000 a year; this amount is indexed to inflation in $500 increments (see Contribution limits below). No prohibitions on income splitting apply, so you can give your spouse or common-law partner money to contribute to their own TFSA without having that amount, or any earnings from that amount being attributed back to you.[9] This is different from the spousal RRSP contributions rules. And, unlike non-registered accounts, or withdrawals from an RRSP, investment earnings are not attributable to the spouse who supplied the funds.

Non-residents can maintain their TFSAs, but no new contribution room is accumulated. Non-residents should not contribute to existing TFSAs, even if they have unused room, as any such contribution is deemed to be an over-contribution and subject to a monthly penalty tax until the contribution is removed or the person becomes resident again in Canada.

Who should contribute to a TFSA?

Many investors wonder whether a TFSA (no tax deduction for contributions but withdrawals go untaxed) or regular RRSP (which allows a tax deduction on contribution but taxes withdrawals fully) is the best choice. For most people in most situations, using the RRSP is likely to be preferable. However, TFSAs are better for those with low to moderate incomes and/or a need for flexible access to savings. For a more detailed discussion see TFSAs versus RRSPs.

Contribution limits

For each year after 2009 and before 2015[10] the TFSA dollar limit is indexed based on the inflation rate. The indexed amount will be rounded to the nearest $500.[11]

For 2015, the dollar limit is $10,000 and is not indexed to the inflation rate.[10]

Starting in 2016, the limit returns to $5500, and consistent with the indexation system in place prior to 2015, the TFSA annual contribution limit for 2016 and subsequent years will be based on the $5,000 TFSA annual contribution limit available in 2009, indexed to inflation using the CPI for each year after 2009 and rounded to the nearest $500.[7]

As of 2017, the total cumulative contribution room for a TFSA is $52,000 for those who have been 18 years or older and residents of Canada for all eligible years.

Year Contribution limit Cumulative room CPI Unrounded Indexed Amount
2009 $5,000 N/A N/A $5,000
2010 $5,000 $10,000 1.4% $5,000 * (1 + 0.014) = $5,070
2011 $5,000 $15,000 0.6% $5,070 * (1 + 0.006) = $5,100
2012 $5,000 $20,000 2.8% $5,100 * (1 + 0.028) = $5,243
2013 $5,500 $25,500 2.0%[12] $5,243 * (1 + 0.020) = $5,348
2014 $5,500 $31,000 0.9%[13] $5,348 * (1 + 0.009) = $5,396
2015 $10,000 $41,000 1.7%[13] $5,396 * (1 + 0.017) = $5,488
2016 $5,500 $46,500 1.3%[13] $5,488 * (1 + 0.013) = $5,559
2017 $5,500 $52,000 1.4%[13] $5,559 * (1 + 0.014) = $5,637
2018 $5,500 $57,500 1.5%[13] $5,637 * (1 + 0.015) = $5,722

Unused contribution room, as for RRSPs, can be carried forward indefinitely.


Withdrawals are permitted at any time; the amount that is cashed out can be recontributed in a subsequent calendar year. That means, effectively, that growth on the original investment counts toward recontribution room. For example, if the TFSA account is worth $5200 after the first year and the investor withdraws $5100, that $5100 can be recontributed later.

Unlike an RRSP or an Registered Retirement Income Fund (RRIF), there is no terminal date for a TFSA before death. At death, TFSA earnings cease to be tax-exempt; there are special rules for spousal transfers.


If you want to transfer funds from one TFSA to another or from one financial institution to another, there will be no tax consequences if your financial institution completes a direct transfer on your behalf.[14] For additional information, contact your financial institution. You should check with both issuers to determine if there are any transfer fees involved, and if so, whether the receiving institution will cover the fees charged by the sending institution.

If you withdraw the funds yourself and contribute them to another TFSA this could have tax consequences depending on the timing of the withdrawal and subsequent contribution. See Over-contributions.

In kind transfers of stock positions from a non-registered account to a TFSA are a valid way to contribute, but such transfers should ideally be done close to the adjusted cost base (ACB). If the price of the transferred security is higher than the ACB, a capital gain will occur and will be taxed. If the price is lower than the ACB, a capital loss will occur but cannot be used to offset gains. These are the same rules as for in kind transfers to RRSPs.


One should be aware of how over-contribution, also known as an excess TFSA amount, is defined.[15][16] Withdrawals during the year that are subsequently re-deposited during the year are considered a new contribution. For example, if you contribute $5000 on January 1, withdraw it on January 2, and re-contribute it on January 3, you will be deemed by Revenue Canada to have contributed $10,000 for the tax year. You will be charged a penalty of 1% of the over-contributed amount times the number of months that it was over-contributed - 1% x $5,000 x 12 = 1% x $60000 = $600. None of the examples given clearly show this situation.

The TFSA contribution rules[11] state:

At any time in the year, if you contribute more than your allowable TFSA contribution room, you will be considered to be over-contributing to your TFSA and you will be subject to a tax equal to 1% of the highest excess TFSA amount in the month, for each month you are in an excess contribution position.

Additionally, as of October 20, 2009, that changed[17] [18]:

Finance said that “some TFSA holders are attempting to generate a rate of return” by going over the limit for “a short period of time,” in the belief they can earn more than enough to outweigh the cost of the penalty. To close the loophole, Finance instructed the Canada Revenue Agency to charge a levy of 100 per cent on over-contributions.

Carrick has suggested[19] that CRA may be willing to provide relief from the penalties if an honest mistake was made. The appropriate form is RC4288 Request for Taxpayer Relief.

Eligible investments

Generally, the types of investments that will be permitted in a TFSA are the same as those permitted in a registered retirement savings plan (RRSP).[20]. In general, TFSA rules allow "in kind" contributions and transfers from RRSPs, subject to some eligibility rules and potential tax considerations.

Foreign withholding taxes

Although US-based exchange-traded funds (ETFs) or stocks can be placed within a TFSA, US taxes will be withheld on distributions. Unfortunately, no Canadian tax credit can be claimed for these taxes. Therefore, US-based stocks and ETFs should generally be placed outside a TFSA.

If dividend income from a foreign country is paid to a TFSA, the dividend income could be subject to foreign withholding tax.[20]

Types and offerings

There are three different types of TFSAs that can be offered:

  • a deposit
  • an annuity contract
  • an arrangement in trust

Banks, insurance companies, mutual fund companies, credit unions and trust companies can all issue TFSAs. In addition, a self-directed TFSA can be established at discount brokerages if you prefer to build and manage your own investment portfolio by buying and selling different types of investments such as mutual funds, exchange-traded funds, stocks and bonds.

Questions and Answers from CRA

CRA maintains a website with TFSA key topics.[21] Some key topics are listed below.

See also


  1. Archived - Budget 2008 - Tax Free Savings Account, viewed February 17, 2012.
  2. 2.0 2.1 Government of Canada, TFSA, Tax-Free Savings Account, viewed Feb. 17, 2009
  3. TFSA withdrawal rule keeps catching unwitting Canadians - Business - CBC News
  4. CATO Institute, TFSAs Spur Canada Savings Revolution, viewed January 6, 2017.
  5. Department of Finance Canada, Backgrounder: 2013 Tax-Free Savings Account Annual Contribution Limit Increase, viewed November 26, 2012.
  6. Budget 2015 - Annex 5.1 - Tax Mesures: Supplementary Information, viewed April 21, 2015
  7. 7.0 7.1 Department of Finance, Backgrounder: Middle Class Tax Cut, viewed December 7, 2015
  8. Tax-Free Savings Account (TFSA) for Individuals, viewed Feb 5, 2012
  9. Canada Revenue Agency, TFSA Contributions, viewed January 11, 2016.
  10. 10.0 10.1 Budget 2015 - Annex 5.2: Notices of Ways and Means Motions, viewed April 21, 2015.
  11. 11.0 11.1 Canada Revenue Agency, TFSA contribution room, viewed July 19, 2012
  12. Canada Revenue Agency, 2013 indexation adjustment for personal income tax, benefit amounts, and the annual dollar limit for Tax-Free Savings Accounts (TFSAs), viewed December 19, 2013.
  13. 13.0 13.1 13.2 13.3 13.4 "Indexation adjustment for personal income tax and benefit amounts". Government of Canada. Retrieved December 6, 2017.
  14. Canada Revenue Agency, Transfers between your own TFSAs, viewed November 26, 2012.
  15. Canada Revenue Agency, Tax payable on excess TFSA amount, viewed November 26, 2012.
  16. Ellen Roseman, Taxpayers hit with penalties on tax-free savings accounts, The Toronto Star, June 12, 2010
  17. Kevin Carmichael, Ottawa targets abusers of tax-free savings accounts, Globe and Mail, Report on Business, October 20, 2009
  18. Canada Revenue Agency, Tax payable on an advantage, viewed September 10, 2012.
  19. Rob Carrick, Taxman may forgive TFSA rule breakers, Globe and Mail, Report on Business, June 17, 2010.
  20. 20.0 20.1 Canada Revenue Agency, Types of investments, viewed July 19, 2012
  21. Canada Revenue Agency, The Tax-Free Savings Account, viewed July 19, 2012.

Further reading

External links