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 2023, it’s $6,500), 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. If you were born before 1991, you can deposit a total of $81,500 in 2023 with any future earnings being tax-free.
What is a TFSA or tax-free savings account?
As the name implies, a TFSA is a savings vehicle that acts as a tax shelter for your earnings. With a TFSA, you won’t have to pay income tax on any interest earned or any capital gains from investments. A TFSA allows you to invest in your savings and to withdraw cash without paying taxes on your earnings and withdrawals. A TFSA differs from an tax-deferred account such as an RRSP, which not only requires you to pay tax on early withdrawals, but to also pay income tax on your withdrawals later in life as if they were an income source. For more, read our TFSA vs RRSP guide.
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 is limited 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.
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Opening a TFSA is similar to opening a bank account. Canadian residents who are 18 or older and have a valid Social Insurance Number (SIN) are eligible to open a TFSA. To open an account, walk through these steps:
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.
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.
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.
How do tax free savings accounts work?
Since a tax-free saving account is a vehicle to shelter your capital gains or the savings interest you’ve earned, how a TFSA works depends on what you’re holding in it. Some choose to hold cash like with a high-interest savings account or HISA, while others choose to hold ETFs, GICs, stocks or bonds in a TFSA—and others hold a mix of investments in a TFSA.
After you open your TFSA account with the financial provider of your choice, make an initial lump sum deposit and contribute annually to watch your savings grow. Just make sure you stick to the general TFSA rules below on TFSA contribution limits and your overall contribution room. You can withdraw from your TFSA at any time, and next year, you’ll have that TFSA contribution limit replenished so you can always add more investments into your TFSA if you haven’t exceeded your maximum TFSA limit.
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, which you can set up with your TFSA provider.
Does a TFSA earn interest?
If you are holding a savings product in your TFSA, such as what you’d find in a high-interest savings account or a GIC , your TFSA will earn interest determined by the interest rate offered by that account. If you hold investments such as stocks, bonds, mutual funds or ETFs, then you won’t earn interest, but you will see capital gains as those investments grow—and you can sell these at any time if you need the funds.
What happens if you over contribute to your TFSA?
If you contribute more than your total contribution room, you’re subject to a 1% TFSA over contribution penalty. The 1% penalty is applied every month to the excess balance as it remains in the account. Let’s look at an example to understand how the TFSA over contribution penalty works. Annette has a current total contribution limit of $12,000. In 2020, she contributed $6,000. In 2021, she contributed $7,000. Currently, her total TFSA balance is $13,000 which is $1,000 over her $12,000 limit. Unfortunately, Annette didn’t notice the error for 4 months. The CRA charges her $40 ($1,000 x 1% x 4 months) for the error. Annette promptly removed the $1,000 and paid the $40 penalty.
TFSA over-contribution form
If you incur a TFSA over contribution penalty, you must complete a TFSA over contribution form, also known as the TFSA tax return. If you incurred a penalty as a result of making a contribution to your TFSA when you were a non-resident of Canada, you must complete the TFSA over contribution form as well. The official name for it is Form RC243, Tax-Free Savings Account (TFSA) Return. When you file your annual tax return, be sure to submit this form as well.
There are some general TFSA rules you need to stick to:
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 2023 is $6,500 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 2023 is $88,000. 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 ($6,500 for 2023, 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 $6,500.
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.
How to withdraw from a TFSA
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 of $81,500 for 2022, 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.
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TFSA Pros and cons
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. Current annual TFSA contribution limit is $6,500 for 2023.
No tax refund. Unlike with an RRSP, contributing to a TFSA doesn’t reduce taxable income, but you won’t pay tax later to access your TFSA funds.
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.
What can you hold in a TFSA?
What types of investments can you make with your TFSA? Like an RRSP, your options are varied and can include the following:
It’s worth noting that TFSA eligible investments include US stocks, too.
How to invest in a TFSA
If you have cash you’d like to save in a TFSA, you have a handful of investment options to choose from. 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, 2022. There’s technically no TFSA deadline if you have unused contribution room carried over from previous years though.
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.
TFSA taxes
As the name suggests, there are no taxes applied to a tax free savings account. When a Canadian contributes to a TFSA, their taxable income is not reduced and there are no tax consequences of withdrawing funds. In addition, interest, dividends and capital gains earned within a TFSA are not taxable.
However, TFSAs have specific contribution rules and there are penalties for a TFSA over-contribution. Every year, the Canadian government specifies a maximum TFSA contribution, and if you exceed that contribution amount you must pay 1% penalty tax on the excess amount for every month the excess remains in the account.
The only other circumstance where you may pay tax on a TFSA is if you become a non-resident of Canada. If you make a contribution to your TFSA when you’re a non-resident of Canada, you’ll be charged a 1% tax on those contributions every month. Generally speaking, a non-resident is someone who resides outside of Canada for the majority of the year (over 183 days).
Is there a TFSA tax return?
TFSA holders do not normally have a tax payable. For this reason, the average Canadian does not have to worry about a TFSA tax return.
A person may incur tax on their TFSA if they don’t abide by the contribution rules or make a contribution when they’re a non-resident of Canada. In this case, the account holder must complete and submit Form RC243, Tax-Free Savings Account (TFSA) Return. In other words, Form RC243 is the TFSA tax return, but you only need to use this if you over-contributed or made a contribution as a non-resident.
If you incur TFSA taxes and believe they should be waived or cancelled, you can submit a request to the CRA. They will consider the following factors:
Tax arose from an understandable error
The transaction that caused tax gave rise to other taxation under the Income Tax Act
Extent which payments have been made from the person’s TFSA
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.
TFSA vs savings account
A TFSA is a savings vehicle, which can hold many kinds of investments and savings sheltered from taxes. The main differences between a TFSA vs savings account is that you won’t pay taxes on the interest earned, but you’ll have annual contribution limits to adhere to—and a TFSA can hold other types of investments in it such as GICs, ETFs, stocks or bonds. If you’re not using a TFSA for your savings, and are instead holding all of your money in a traditional high-interest savings account, you’d have to pay taxes each year on the interest earned. To learn more, read our guide on how interest is taxed on savings accounts.
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!
Tax-Free Savings Account FAQs
The main difference between a TFSA and an RRSP is the tax treatment of contributions and withdrawals. Unlike an RRSP, TFSA contributions are not tax deductible. However, RRSP withdrawals are subject to stiff withholding taxes and count toward your income, which means they are also subject to income tax rates. TFSA withdrawals are completely tax-free.
A TFSA can function just like a savings account if you decide to use it like one and deposit your money in a high-interest savings account as a TFSA. You can also choose to invest the money in your TFSA in options, such as a GIC, ETF, stocks or bonds. A conventional savings account doesn't come with this latter option.
Yes, you can open multiple TFSA accounts—as long as you're staying within your annual TFSA contribution limit for all TFSA accounts together. For example, you can put your emergency savings fund in a high-interest TFSA account that's quick and easy to withdraw from, while having another TFSA account investing in GICs for a three year term. You have to make sure your total contributions across all of your TFSA accounts do not exceed your total contribution room allowed by the CRA.
No, you don't. Contributions to a TFSA are not deductible for income tax purposes. Any amount you've contributed along with any income you've earned in your TFSA accounts are tax-free – even when you make withdrawals.
The CRA will keep track of your TFSA contribution room and will charge you a penalty fee if you exceed it.
Yes, you can. 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.
Your child's TFSA contribution room starts to accumulate at age 18. If your child turned 18 in 2023, they would start off with this year's contribution limit – $6,500. The TFSA must be opened in your child's name, the account will belong to them and you can give your child money to make deposits to their TFSA. The only catch? They can make withdrawals at any time because it's their account.
You cannot contribute directly to your spouse's TFSA, but you can give them money to make their own contributions up to the annual TFSA maximum.
If you contribute more than your cumulative limit, the CRA imposes a tax rate of 1% for each month or partial month that your account has excess contributions. The tax will continue to apply until the entire excess amount is taken out of the fund or is absorbed by additions to unused TFSA contribution space in the following years.
No, a TFSA contribution does not reduce your taxable income. However, a contribution to an RRSP does reduce taxable income, but the funds cannot be withdrawn again until retirement without severe tax consequences.
No, there is no withholding tax for TFSAs because they are not subject to tax. However, if you over contribute to your account, you may incur a TFSA over contribution penalty tax, but this is not withheld from your account. Instead, the CRA will invoice you for it.
Carmen Chai is a freelance writer at Finder, specializing in financial products. She is an award-winning Canadian journalist who has lived and reported from major cities such as Vancouver, Toronto, London and Paris. She has reported on personal finance, mortgages, and banking products for nearly a decade.
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