Tax Free Savings Account

What is a TFSA you ask? Tax Free Savings Accounts were first introduced in Canada in 2009. A TFSA, as the name suggests, allows your investments to grow tax free. This means that any gains from the investment are not taxable by Canada Revenue Agency and unfortunately any losses are not tax deductible against other capital gains. You can hold a variety of investments within your TFSA including stocks and Exchange Traded Funds (ETFs) making them very flexible accounts. TFSAs cannot be joint which means each person has their own contribution room. Near the end of each year CRA will announce the following year’s annual contribution limit which is typically indexed to inflation. As of January 2023, the lifetime contribution limit is $88,000.

It’s also important to note account limits apply to your contributions, not your account balance. For example, if you contribute $75,000 (assuming you have the room) at the beginning of the year and your investments grow to $85,000, you can still contribute $6,500 in that year. If you have not maxed out your annual contribution, the remaining balance will be carried forward. Assume the annual limit is $6,000 but you only contribute $4,000. The remaining $2,000 can be added to you annual limit in the following year. Withdrawal are not taxable so for any person collecting income tested government benefits they will not be affected. One of the benefits TFSAs have over RRSPs is that withdrawals from TFSAs may be added to your annual contribution limit next year. For example assuming you have maxed out contributions and withdraw $3,000 earlier this year. Next year you can contribute your new annual limit, which as of 2023 is $6,500 plus the previous year’s withdrawal amount of $3,000. Best practice is to not make frequent withdrawals and deposits to your TFSA because it can make keeping track of your max limit a challenge.

You must be the age of majority in your province to open a TFSA however contribution room begins at age 18. Annual contribution limits have changed since 2009 so always confirm with CRA your available limit. You must also hold a valid SIN number. You can have multiple TFSAs within institutions or across institutions as long as the cumulative contributions don’t exceed the maximum.