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Tax-free savings accounts (TFSA)

With a TFSA, you can invest up to $6,000 per year without having to pay capital gains taxes.

A tax-free savings account (TFSA) gives Canadians the rare opportunity to make capital gains and earn dividends without having to pay taxes on their returns. In 2009, the Canada Revenue Agency (CRA) created a new program that allowed Canadian residents to shelter $6,000 a year in investments in a tax-free savings account.

Although the TFSA contribution limit has changed over the years (in 2020 it was $6,000), the contribution room accumulates every year just like a Registered Retirement Savings Plan (RRSP). This means any unused room is carried over to subsequent years, allowing you to invest considerable sums of money without having to worry about paying taxes on contributions or earnings.

What is a tax-free savings account (TFSA)?

As the name implies, a TFSA is a savings account that allows you to invest in your savings and to withdraw cash without having to pay taxes on your contributions, earnings and withdrawals.

  • Canadian residents who are 18 years of age or older with a valid Social Insurance Number (SIN) can open a TFSA by visiting a financial institution, such as a bank, credit union, trust company or insurance company.
  • The amount of money that can be contributed to your TFSA islimited each year, but any unused room is carried over to subsequent years.
  • You can invest the money in your TFSA in exchange traded funds (ETFs), guaranteed investment certificates (GICs), stocks, bonds and, of course, a traditional savings account.

How does a TFSA work?

Making use of your TFSA is easy. After you open your account, make a deposit and watch your savings grow. You can choose to keep your money in a high-interest savings account or invest it in ETFs, GICs, stocks or bonds too.

Just make sure you stick to the general rules we outline below on TFSA contribution limits and your overall contribution room.

You can withdraw from your TFSA at any time.

Contributing to your TFSA

You can start contributing to your TFSA as soon as you open up an account. This includes depositing cash as well as purchasing investments. Contributions can be made in lump sums or recurring deposits.

There are some general TFSA rules you need to stick to though:

  • Stick to your annual TFSA contribution limit. Your TFSA contribution limit is the amount you can contribute for that calendar year. The contribution limit for 2021 is $6,000 as defined by the Canada Revenue Agency.
  • Keep track of your TFSA contribution room. Your TFSA contribution room is the maximum amount you can contribute to your TFSA. If you didn’t hit your contribution limit in previous years, any unused contribution space is carried forward indefinitely. The TFSA program started in 2009, so if you were 18 or older that year, your TFSA contribution room has been increasing since then.
  • Don’t make a TFSA over-contribution. If you deposit more than the maximum TFSA contribution allotted to you, it is considered an over-contribution. A TFSA over-contribution will lead to the CRA charging you a penalty of 1% per month on your excess contribution.

For example, the annual TFSA contribution limit from 2009 to 2012 was $5,000. If you didn’t have the spare cash to save in a TFSA, you’ll have $20,000 in TFSA contribution room carried forward from those 4 years.

The lifetime contribution room by 2021 is $75,500. If you’ve already deposited some money over the years, subtract how much you’ve invested so far to figure out your maximum TFSA contribution room.

Keep in mind, contribution limits may change in any given year, so it’s important to check the CRA website to learn more about how much you can put into the fund.

How to check your TFSA contribution room

If you want to figure out how to check your TFSA contribution room for the year, take the current year’s annual dollar limit ($6,000 for 2021, for example), any unused contribution room from previous years and any withdrawals made from your TFSA in the previous year.

If you’ve made a withdrawal from your TFSA, you can only recontribute this amount in the year after.

If you want to find the TFSA limit for the year, check the CRA website to learn more about how much you can put into the fund.

You can also use these resources to determine how much you can put in your TFSA:

  • The Canada Revenue Agency website. If you want to find your TFSA limit for the year and for previous years, check the CRA website to learn more. This year’s contribution limit is $6,000.
  • Log in to your CRA Account. You can log in to your Account for Individuals on the CRA website or to the MyCRA mobile app. Your account stores your information on your income taxes, RRSP contribution room and TFSA contribution room. If you don’t have an account or don’t know if you have an account, click on “Sign-In” or “Register” and follow the registration instructions.
  • Call the CRA Tax Information Service. Call CRA TIPS at 1-800-267-6999 to get help over the phone. You’ll need your date of birth, SIN and Line 15000 from last year’s tax return, which you can find on your Notice of Assessment.

Make sure you’re keeping track of your contributions, withdrawals and maximum contribution room to avoid over-contributing. Because CRA updates can be delayed, your TFSA contribution number may not be correct.

TFSA withdrawal rules to follow

You might be wondering how to withdraw from a TFSA. Generally speaking, you can withdraw any amount from your TFSA at any time without penalty. Here are some key TFSA withdrawal rules to bear in mind:

  • How long it will take to withdraw your cash. The ease with which you can draw money depends on the liquidity of your holdings. If you have cash holdings, you can move your savings between accounts and withdrawals can be done immediately. However, if your money is tied up in investments like stocks, GICs, ETFs or bonds, you would need to sell the security or wait for it to reach maturity before you can withdraw the proceeds.
  • When you can re-contribute to your TFSA. If you want to re-contribute or replace the amount you withdrew, within the same year, you can only re-contribute if you have TFSA contribution room available from previous years. If you’ve hit your lifetime contribution room, you can only recontribute and replenish this amount in the following year.
  • You won’t have to pay any taxes. Contributions to a TFSA are not deductible for income tax purposes. Is there a penalty for withdrawing from a TFSA? Not at all. Any contributions and withdrawals you make as well as any interest earned on your savings are tax-free too, whenever you’re taking money out of a TFSA.

Pros and cons of a TFSA

    There are TFSA advantages along with some drawbacks you’ll need to take into account.

    Benefits of a TFSA

    • Grow your investments tax-free. The biggest benefit of a TFSA is in the title itself; the account allows you to grow your savings, earn interest on your investments and withdraw earnings without having to pay withholding fees or capital gains taxes.
    • Retirement planning. In addition to an RRSP, a TFSA can be used to pay income during retirement. This gives individuals another option when saving for retirement.
    • Lifelong ownership. Unlike an RRSP, a TFSA doesn’t have to be closed at a certain age.
    • Keep your contributions. If you don’t use all of your annual contribution limit, you can carry forward the remaining room indefinitely.
    • Lots of investment options. Aside from a traditional savings account, you can invest the money in your TFSA in exchange traded funds (ETFs), guaranteed investment certificates (GICs), stocks and bonds.
    • Easy, tax-free withdrawals. You can withdraw any amount from your TFSA at any time without paying any penalties or taxes. How easily you can withdraw money depends on where you’ve parked your cash.
    • Flexibility to fit your savings goals. Whether you’re saving up for a vacation, to buy a house or to prepare for retirement decades later, TFSA accounts offer flexibility because you can decide on how accessible you want your savings to be. You can set aside cash in a standard TFSA savings account or lock it away for a short period of time in ETFs or bonds. You can also play around with levels of risk from guaranteed income certificates to stocks.

    Disadvantages of a TFSA

    • Small contribution limit. Savers who utilize all of their contribution room may find TFSAs limiting in terms of how much they can invest. This is especially the case after 2015 when the TFSA contribution limit was virtually cut in half.
    • No tax refund. Unlike with an RRSP, contributing to a TFSA doesn’t reduce taxable income.
    • Penalties for over-contributing. If you deposit more than the maximum TFSA contribution allotted to you, it is considered an over-contribution. Even if you’ve over-contributed by accident, a TFSA over-contribution will lead to the CRA charging you a penalty of 1% per month on your excess contribution.
    • Hard to track. Because you can open as many TFSAs as you’d like, it’s easy to lose track of how much you’ve contributed across the board. It’s your job to make sure you’re not exceeding your maximum contribution room when you add up all of your deposits across your accounts.

    Eligible investments in a TFSA

    What types of investments can you make with your TFSA? Like an RRSP, your options are varied, including the following:

    • Cash
    • Mutual funds
    • Exchange traded funds (ETFs)
    • Stocks
    • Guaranteed income certificates (GICs)
    • Bonds (government and corporate)
    • Certain shares of small business corporations

    It’s worth noting that TFSA eligible investments include US stocks, too.

    How to invest with a TFSA

    If you have cash you’d like to save in a TFSA, you have a handful of investment options to choose from – listed above.

    Choosing the best investments for your TFSA will depend on your individual risk tolerance, your goals and your time horizon.

    If you’re building up a rainy day fund, you may prefer that cash in a high-interest TFSA that you can quickly withdraw from in case of an emergency. However, if you’re saving for a down payment on a house or for retirement plans in the future, you may opt for buying GICs or bonds that are locked in for a few years at a time.

    Some people may be less risk averse with an interest in investing in stocks to try for a bigger return, while others prefer a guaranteed return. Ultimately, it’s your personal preference and your financial situation that you need to take stock of.

    Once you’ve decided which route you want to take, work with your financial institution to set up your account and invest your savings.

    Don’t forget to stick to the TFSA rules, specifically your TFSA contribution limit for the year and your overall contribution room. The TFSA deadline for making contributions for this year is December 31, 2021. There’s technically no TFSA deadline if you have unused contribution room carried over from previous years though.

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    How to open a TFSA

    Opening a TFSA is similar to opening a bank account. Canadian residents who are 18 or older and have a valid Social Insurance Number are eligible to open a TFSA. To open an account, walk through these steps:

    1. Decide on how you want to save or invest. You can open a TFSA and use it just like a traditional savings account, but you can also opt for investing in a GIC, ETF, stocks or bonds. Think about your financial goals and if you need your savings to be easily accessed.
    2. Choose a financial institution. From banks, credit unions, online trading platforms and robo-advisors, your options are endless for choosing where you want to open your TFSA. Do your homework by comparing accounts and interest rates to find the best choice to suit your needs.
    3. Open your account. Once you’ve decided on who you’d like to bank with, get in touch to open your account. They will serve as the issuer of your TFSA. It shouldn’t take more than 20 minutes to complete if you have all the documentation ready. When you’re all set up, you can begin making contributions right away.

    TFSA fees

    While you won’t be charged for depositing or making withdrawals into your TFSA, fees may crop up depending on where you open the account and what kinds of investments you choose. Here’s an overview of some of the fees your financial institution may charge you:

    • TFSA annual administration fees. While some banks won’t charge you for managing your investments, others do. Annual administration fees to the tune of about $50 can be charged for the behind-the-scenes work with record-keeping and reporting to the CRA. Some banks waive this fee if you have a minimum balance in your TFSA.
    • TFSA transfer out fees. The majority of Canadian banks will charge you a fee if you decide to move your TFSA account to a different bank. This charge can vary from $50 up to $150. Most banks won’t charge you if you’re moving cash between TFSA accounts within the same financial institution.
    • Trading/investment fees. If you’re investing your TFSA in stocks and ETFs, you may have to pay a fee to your bank or online brokerage firm. There are stock trading platforms, such as Wealthsimple and Questrade, as well as services provided by major banks, such as CIBC Investor’s Edge, TD Direct Investing and Scotiabank iTRADE, that you can use.

    TFSA fees aren’t hidden in the fine print so double-check when you’re choosing which financial institution to work with for your TFSA. As always, do a TFSA fees comparison to help you decide.

    What is a TFSA’s interest rate?

    A TFSA isn’t a traditional savings account. Instead, your TFSA account can hold a variety of investments, from ETFs and GICs to stocks and bonds, so there isn’t one catchall TFSA interest rate.

    With so many ways to invest your money, your TFSA rate of return will fluctuate depending on which option you choose.

    ETFs and stocks will fluctuate depending on the market and how their prices change throughout the day. Keep an eye out for fees and commissions you may have to pay for when buying or selling through your brokerage account.

    Bottom line

    TFSAs are a great opportunity for Canadians to maximize their savings with flexibility. It’s no wonder they’re so popular – your income from your TFSA is 100% tax-free, you can invest in a string of options and you can make withdrawals at any time. Banks, online financial institutions and robo-advisors all offer TFSA products to suit a variety of needs, whether you’re looking for the perfect place to park your emergency savings while earning interest or you’re looking for a big impact return with stocks and ETFs.

    You can even spread out your savings across several TFSA accounts each set up for your different financial priorities.

    Now that you’re all caught up on TFSAs, it’s time to get in on the tax-free savings. Good luck!

    Frequently asked questions about tax-free savings accounts

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