TFSA – Tax-Free Savings Account Rules? Advantages?

The TFSA is a savings plan that allows you to save tax-free savings in order to realize your most expensive projects (home, car, retirement savings, etc.) .

Here's what you need to know about the TFSA.

Who can benefit from a TFSA?

A TFSA could be appropriate for anyone who has investments outside a registered plan.

It’s suitable for people with a modest or high income.

Be aware! There may be certain fees associated with a TFSA. Check with your financial institution before opening an account.

Contribution rules

TFSA contributions are limited

Provided that you’re 18 years old and you hold a valid social insurance number, you’ll accumulate new contribution room every year. You therefore cannot contribute before the age of 18. This amount can vary from one year to the next. If you don’t use it, you can do so later on.

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Contributions - Annual limits

Money can be withdrawn from the TFSA and then put back the following year. This means your contribution room is never lost.

For example:

  • You’ve accumulated $20,000 in your TFSA.
  • You withdraw $7,000 to go on a trip.
  • As of the following year, you can put the $7,000 back in your TFSA (in addition to the maximum amount allowed for the year).
2009 to 2012 $5,000
2013 and 2014 $5,500
2015 $10,000
2016 to 2018 $5,500
2019 to 2022 $6,000
2023 $6,500
2024 $7,000

Example of cumulative maximum contribution

  • A person born before 1991 (who was 18 or older in 2009) could contribute a maximum of $88,000 by the end of 2023 ($95,000 by the end of 2024).

Advantages of the TFSA

  • The income generated in your TFSA is not taxable. You therefore save on taxes and can accumulate more money than if you invest outside a registered account.

    For example:
    • You invest $5,000 in a guaranteed investment certificate (GIC)A guaranteed investment certificate (GIC), also called a certificate of deposit or term deposit, is a security indicating that an investor has lent money to a financial institution. GICs earn interest.  within your TFSA.
    • The certificate earns 2% per year. After 5 years, your total earnings are $520. You’ve now accumulated $5,520.
    • Since the money is invested in your TFSA, you don’t pay any tax on the $520.
    • If the GIC weren’t in your TFSA or other registered account, you would have paid tax every year on your investment income. With a marginal tax rateThe marginal tax rate is a percentage of tax to be paid; it is not calculated on total income (unlike the tax rate), but only on the last dollar earned.
      It answers the question: “If I had earned $1 more, how much additional tax would I have paid?”         of 37.1%, you would have accumulated $5,323, or $197 less.
    • When you want to withdraw your money from your TFSA (whether it’s your contribution amounts or the investment income), you won’t pay any tax on it.

TFSA or RRSP: Which one to choose?

Neither option is better than the other. Each has its advantages and drawbacks, as explained in the table below.

TFSA-RRSP comparison table
Features TFSA RRSP

Tax deductible contributions

No, but the money you withdraw from a TFSA isn't taxable.

Yes, but the accumulated money will be added to your income when you withdraw it.

Withdrawals

  
  • Whenever you like
  • Non-taxable
 		  
  • Whenever you like
  • Taxable
 

Minimum age

As of age 18

  
  • No minimum age
  • As soon as you report income, you build contribution room.
 

Contribution amount

 See the Table of TFSA contribution limits  
  • 18% of your income (up to maximum of $30,780 in 2023 and $31,560 in 2024), minus the pension adjustment indicated on your T4 slip issued by the Canada Revenue Agency.
  • Unused contribution room can be used in subsequent years.
 

Cumulative contributions (unused contribution room can be added in subsequent years)

Yes

Yes

Over contribution

Monthly penalty of 1% of the amount in excess of the limit 

Monthly penalty of 1% of the amount in excess of the limit 

Qualified investments

The same as for an RRSP, except for labour-sponsored funds (which can't be put in a TFSA).

  
  • Guaranteed investment certificates (GICs)
  • Stocks (shares)
  • Bonds
  • Mutual funds
  • Labour-sponsored funds
  • Etc.
 

Spousal plan contribution

No, but you can give your spouse the money to contribute to their TFSA.

Yes, however you, and not your spouse, will benefit from the tax deduction.

Investment incomeInvestment income is the money that an investor earns through their investment. This money can be in the form of interest, a capital gain, etc.

Non-taxable

Non-taxable. However, RRSP withdrawals are taxable.

Option of putting back withdrawn amounts

Yes. You can put the withdrawn amounts back in your TFSA if you wish, but you can do so only as of the following year. 

No, except if the withdrawal is made under the Home Buyers' Plan (HBP), the Lifelong Learning Plan This link will open in a new window (LLP), or similar plans.

Cumulative contributions

Yes. If you don't contribute in a given year, your unused contribution room can be used in subsequent years.

Yes. Unused contribution room since 1991 is carried forward. You could therefore contribute the amounts at a later date.

Institutions offering the product

Same as for RRSPs

Most financial institutions, such as banks, credit unions, trust companies, life insurance companies and mutual fund firms. 

Opening several accounts with various institutions

Same as for RRSPs

Yes. The contribution limit applies to the total amount held in all institutions. Therefore, if you have $10,000 in available contribution room, you are entitled to contribute $10,000 in total, not $10,000 per institution.

Borrowing to contribute

Yes. However, the interestInterest is a percentage of an amount, paid at a given frequency (for example, 2% per year). It is paid by the borrower to compensate the investor for lending them the money.
When an investor deposits money in their account at the bank, the bank uses it for other purposes. The investor therefore lends their money to the bank, which compensates the investor by paying them interest.   on the loan isn't tax deductible. 

Also, there is no tax refund to help you repay the loan.

Termination

Upon the death of the account holder.

On December 31 of the year in which you turn 71. At that point, you can transfer the holdings to a Registered Retirement Income FundA Registered Retirement Income Fund is a plan that allows participants to defer taxes on investment income. The funds held in a RRIF are usually transferred from an RRSP.
Unlike with an RRSP, participants in a RRIF must withdraw a minimum amount each year (as with a LIRA).
Amounts withdrawn are taxable, as with an RRSP.  (RRIF), purchase an annuityAn annuity is a contract that allows you, once you have paid a certain amount, to receive periodic payments over a given period of time. There are several types of annuities, including:
Annuity certainDeferred annuityGuaranteed annuityIndexed annuityLife annuityEtc. or withdraw the funds from your RRSP.

Tax-Free First Home Savings Account (FHSA)

The 2022 federal budget proposes to create a “Tax-Free First Home Savings Account” (FHSA). Here are the proposed features of this new account.

Features FHSA

Eligible individuals

First-time home buyers.

Launch of the plan

Starting in 2023.

Contribution limit

$8,000 annual contribution limit per person ($40,000 lifetime limit). For a couple, each spouse may contribute up to $8,000 a year for a total of $16,000 (up to a lifetime contribution limit of $80,000).

Tax

Contributions are tax-deductible (like an RRSP).

Amounts invested in an FHSA accumulate tax-free.

Qualifying withdrawals from an FHSA to buy a home (including investment income) are not taxable, as in the case of a TFSA.
Insight

For more information, consult our FHSA section

End of the insight

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