Tax-Free Savings Account

A  (TFSA) is a type of registered account into which Canadians aged 18 and over can contribute every year, within strict limits. 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.

Despite the term "savings" in the name of the account, it can also be used for investment, e.g. for retirement.

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, such as Old Age Security, the Guaranteed Income Supplement and the Canada child benefit.

By the end of 2019, approximately 15.3 million Canadians had opened a TFSA, and financial assets held in TFSAs were worth $350 billion. Among TFSA holders, 1.4 million (9%) maximized their contribution in 2019.

Who can contribute to a TFSA?
TFSAs are available to Canadian residents 18 years and older who have a valid Canadian social insurance number. It is important to be wary of your available contribution room (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. 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 many people in many 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.

History
The TFSA was introduced in the 2008 Federal Budget and accounts could be opened starting on January 1, 2009. The contribution room for the first year (2009) was $5000, subject to inflation adjustments in $500 increments.

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

Budget 2015 proposed to increase the TFSA annual contribution limit to $10,000. This increase applied as of January 1, 2015. The TFSA annual contribution limit would no longer be indexed to inflation.

In December 2015, the Department of Finance announced returning the 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.

In 2019 the annual contribution room was raised from $5500 to $6000.

Summary table
In 2021 the total cumulative contribution room for a TFSA is $75,500 for those who have been 18 years or older and residents of Canada for all eligible years. The cumulative limit will rise to $81,500 in 2022. The cumulative contribution room does not include any withdrawals made from the TFSA in the previous years.

Unused contribution room can be carried forward indefinitely.

Checking your contribution room
Your TFSA contribution room information can be found by going to CRA's My Account service. It is important to be aware of the note on contribution limits from the My Account website which states:


 * "Any contributions that are made or withdrawn from a TFSA in the prior year may not be reflected in your available current year contribution room until after the end of February. All issuers have until the last day of February to electronically submit a TFSA record to the CRA for each individual who has a TFSA. Any transactions made in the current year will not be included."

The tax department makes it clear that you must keep records about your TFSA transactions to ensure that you do not exceed your TFSA contribution room.

Withdrawals
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.

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. 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 be subject to over-contribution penalty depending on your available contribution room and 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.

Over-contributions
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.

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 given clearly show this situation.

Over-contributions are also known as an "excess TFSA amount". The TFSA contribution rules state that:
 * 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, if CRA decides you made a deliberate over-contribution, this is considered an "advantage", and subject to a special tax of 100% on any income or a capital gain resulting from this advantage. The over-contribution is deliberate if it was "knowingly made by an individual in excess of their TFSA contribution limit, generally with a view to generating a rate of return sufficient to outweigh the cost of the 1% tax".

Carrick has suggested 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.

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.

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). . This includes:
 * cash
 * mutual funds
 * securities listed on a designated stock exchange (i.e., stocks, exchange traded funds, ...)
 * guaranteed investment certificates
 * bonds
 * certain shares of small business corporations

In general, TFSA rules allow "in kind" contributions and transfers from RRSPs, subject to some eligibility rules and potential tax considerations.

Short term goals
For short-term saving and investing, for exemple for an emergency fund or a specific project, cash or short term fixed income is typically preferable. See investing plan for short term goals for the financial planning aspect and Short term cash returns for an overview of what products are available.

Long term goals
For long-term investing, such as for retirement, the TFSA should be considered part of a larger portfolio, along with RRSPs, non-registered accounts, etc. This overall retirement portfolio should ideally be managed according to an investment policy statement, which includes an asset allocation. Implementation of this asset allocation is covered in portfolio design and construction. The main asset classes to consider are cash, fixed income and equities. Maximum simplicity can be obtained with asset allocation ETFs.

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 unrecoverable foreign withholding tax.

Questions and Answers from CRA
CRA maintains a website with TFSA key topics. Some topics are listed below.
 * Opening a TFSA
 * Contributions, withdrawals and transfers
 * Types of investments
 * Tax payable on TFSAs
 * Life events
 * Death of a TFSA holder;
 * Breakdown of marriage or common-law partnership;
 * Leaving Canada