Investing Personal Finance Saving Tax

TFSA – Tax Free Savings Account explained

Sometime in 2009, the Canadian government introduced a savings incentive program through the Tax Free Savings Account — also known as the TFSA. While it is called a savings account, it is used as a means to also invest in different classes of assets. For this reason, most people refer to the TFSA as an investment account.

If you are wondering how this account is meant to be an incentive for saving, here’s what you need to know about the TFSA.

What is a TFSA?

A TFSA is a registered account that allows you to grow your savings tax-free. For those who are new to investing, any return on investment — either in the form of capital gains (increase in value) or dividends, is subject to tax. You are expected to pay taxes on your investment gains to the Canadian Revenue Agency (CRA). The CRA is responsible for collecting taxes for the Canadian Government.

This is where the advantage of a TFSA comes in. If you invest through a Tax Free Savings Account, any returns on investment would not be taxed. When you save money through your TFSA, if this money grows, you can withdraw the principal and the gain without paying taxes to the Canadian government. This is different from the tax deduction advantage of the Registered Retirement Savings Plan (RRSP).

The TFSA Limit

There is a contribution room for the Tax Free Savings Account. What this means is, for every individual, there is a limit to how much you can contribute to your TFSA each year. If you make a TFSA contribution that counts as a replacement or re-contribution of withdrawals made from a Tax Free Savings Account, this will still count against your contribution room. It is important to track your withdrawals and annual contributions to ensure that you do not exceed your contribution room.

There are some exceptions to the rule for calculating the contribution room, these include any qualifying transfers, exempt contributions, or specified distributions.

What Happens If You Exceed Your TFSA Contribution Room?

If you contribute above the contribution limit for your TFSA in a given year, the over-contribution amount will be taxed at 1% of the highest excess TFSA amount in the month, for each month that the excess amount remains in your account. For example, if you have a contribution limit of $6000 in a year and you contribute up to $7000 by a certain month, the excess of $1,000 will be subject to a tax equal to 1% for each month it stays in your account.

What is the Tax Free Savings Account Room For 2021?

For every year you file a tax return, you become eligible to contribute within the TFSA contribution limit. The annual TFSA contribution limit for 2021 is $6,000.

For previous years the contribution limits were:

  • 2009 to 2012: $5,000
  • 2013 and 2014: $5,500
  • 2015: $10,000
  • 2016 to 2018: $5,500
  • 2019 and 2020: $6,000

If you do not file an Income Tax and Benefit Return and contribute to your Tax Free Savings Account, Your TFSA contribution room will be accumulated and carried over for the year. For example, if you were eligible to contribute to a TFSA from 2019 but did not make any contributions, in 2021 you would have a contribution room of $18,000 ($6,000 for 2019, $6,000 for 2020, and $6,000 for 2021).

You can find out more about the Tax Free Savings Account limit on the CRA website.

How To Open a Tax Free Savings Account

The first step to take before you open a TFSA is to shop around. Most financial institutions offer a Tax Free Savings Account as a financial product. However, there may be varying terms and conditions, historical performances — in terms of rates of return on your investments.

After you have decided on the financial institution you want to open a Tax Free Savings Account with, you would then need to contact them, usually by walking into a physical store or by a telephone call. Some financial institutions offer the ease of opening a TFSA online.

If you are knowledgeable about investing, you can choose to open a self-directed TFSA. This way, you can choose your own financial assets and build your investment portfolio.

Requirements to Open a TFSA

Given that the Tax Free Savings Account was established to encourage saving, there are no stringent requirements involved in opening one.

You would need to be at least 18 years old to open a TFSA. Additionally, you need to have a valid social insurance number, also known as the SIN before you can open a Tax Free Savings Account. Other supporting documents may be required by the financial institution of your choice.

Interestingly, you can open a tax free savings account even if you are not a resident of Canada. However, when you make contributions into a TFSA as a non-resident, any contributions made while a non-resident will be subject to a 1% tax for each month the contribution stays in the account.

Making Withdrawals From Your TFSA

Depending on how liquid your TFSA assets are, you can withdraw from your tax free savings account at any time. However, note that your withdrawals made in a year do not increase your contribution limit for the year. Your tax free savings account withdrawals will only be added back to your TFSA contribution room at the beginning of the next year.

In order to avoid over-contributing to your tax free savings account, you need to be mindful of any re-contributions made for withdrawals in a given year. Only if you have an available TFSA contribution room, then can you contribute without being subject to the 1% tax on over contributions. Also when you make withdrawals, the re-contribution room becomes available in the following year.

Any investment losses on your TFSA do not count as qualifying withdrawals and thus would not increase your contribution room.

How Can I know My TFSA Contribution Room?

You can check the Canada Revenue Agency (CRA) website to confirm your TFSA contribution limit for the year. Your TFSA contribution room is usually the sum of the following:

  • the contribution limit of the current year
  • any unused Tax Free Savings Account contribution room from previous years
  • any withdrawals made from the Tax Free Savings Account in the previous year

The CRA obtains your TFSA contribution details from your issuer every year. While it is rare, there may be some errors or mix-ups with the information submitted by your issuer. If this is the case, you can resolve this by contacting your issuer. Any corrections would need to be sent by your issuer to the CRA.

Frequently Asked Questions on Tax Free Savings Account

These are common questions asked about the TFSA with their answers below.

What Investment Assets Can You Purchase In Your TFSA?

A TFSA works as an investment account therefore you can put your money into different assets. Most institutions offer off-the-shelf TFSA that are guaranteed investment certificates (GICs) or mutual funds. The mutual funds would contain various investments assets such as cash, stocks, fixed income securities, bonds, real estate, and other alternative investments.

Is There a Lifetime Limit For TFSA Contribution?

Yes. As of 2021, the lifetime contribution limit for the TFSA is $75,500. While the contribution room is accumulated and carried forward, there is a cap on the lifetime contribution to your TFSA.

Can I have multiple Tax Free Savings Accounts

Yes, you are allowed to have multiple TFSAs but you need to ensure that you track your contributions and withdrawals across all accounts so that you do not make the mistake of over contributing in a given year.

Is it possible to close a Tax Free Savings Account?

Yes, you can close a Tax Free Savings Account but you need to be mindful of any associated fees.

Can I switch my Tax Free Savings Account issuer?

Yes, you can switch your Tax Free Savings Account from one issuer to another. However, you may incur some fees for doing this depending on the respective issuer. Some financial institutions offer to cover the cost of switching your TFSA to them so make sure to find out from the new issuer you intend to switch to.

Can I lose my money in a Tax Free Savings Account?

It is possible to lose investments in a TFSA depending on the type of financial asset you choose. The risk of losing money is inherent with any type of investment and the TFSA is not exclusive. However, if you are conservative and hold your investments assets in relatively safer assets such as cash, Guaranteed Investment Certificates (GICs) these may be covered by the Canada Deposit Insurance Commission (CDIC).

What Can I Use My TFSA for?

You can use your TFSA to save for any financial goals you have. These may include a house down payment, vacation, buying a car, or even an emergency fund. It is important to note that if you decide to use your TFSA for emergency fund savings, it may include assets that are not relatively liquid and assets that can lose value.

Budget for your monthly TFSA savings using this simple and effective budget template.



I am a business finance professional passionate about teaching financial literacy and personal finance

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