The TFSA

The TFSA is an account in which Canadian residents 18 years and older can save or invest. Income earned on contributions is not taxed. The TFSA account-holder may withdraw money from the account at any time, free of taxes. The Canada Revenue Agency (CRA) describes the difference between a TFSA and an RRSP as follows: “An RRSP is primarily intended for retirement. The TFSA is like an RRSP for everything else in your life.” 

Contributions to a TFSA are not deductible for income tax purposes; contributions to a RRSP are deductible.

A TFSA does not have to be a cash savings account.  Like an RRSP, a TFSA may contain cash and/or other investments such as mutual funds, certain stocksbonds, or GICs. 

Contribution room

The maximum annual contribution room for each year prior to 2013 was $5,000 per year.  Beginning in 2013 it was increased to $5,500 per year.  The 2015 federal budget raised the contribution limit to $10,000, however in December 2015 a newly elected government proposed to restore the pre-2015 contribution limit of $5,500 for 2016.  For 2019, the annual contribution maximum has been increased to $6000.

As of January 1, 2019, the total cumulative contribution room for a TFSA is $63,500 for those who have been 18 years or older and residents of Canada for all eligible years.

Years TFSA Annual Limit Cumulative Total
2009-2012 $5,000 $20,000
2013-2014 $5,500 $31,000
2015 $10,000 $41,000
2016-2018 $5,500 $57,500
2019 $6000 $63,500

Any unused contribution room under the cap can be carried forward to subsequent years.  If you only put in $2000 this year (2019), you could contribute the regular $6000 in the next year(2020), plus the $4000 ($4000 – $2000) you didn’t contribute in 2019.  Those same rules apply to unused ‘cap room’ in previous years.  

Eligible investments

A TFSA can hold any investments that are RRSP-eligible.  A TFSA can be self-directed, in that the person themselves determines the investments held, or it can be part of a directed plan that is offered by an investment company or bank.  Investments can include; publicly traded shares on eligible exchanges, eligible shares of private corporations, certain debt obligations, instalment receipts, money denominated in any currency, trust interests including mutual funds and real estate investment trusts, annuity contracts, warrants, rights and options, registered investments, royalty units, partnership units, and depository receipts. 

Creditor protection

Assets within a TFSA are not protected from creditors in the event of bankruptcy or a financial judgement that results from legal proceedings against the account-holder, whereas those within an RRSP are protected.

Over-contributions

If an account-holder withdraws funds from a TFSA, his or her contribution room is increased by that amount in the tax year after the withdrawal.  An over-contribution may occur when an individual (who has already maximized his TFSA contributions) might have the mistaken belief that a withdrawal from the TFSA will immediately create contribution room and ‘re-contribute’ the withdrawn funds later in the same calendar year.

Fast points summary

  • The contribution room is carried forward.  If you don’t use it all this year, you can carry it forward and include it in next year’s contribution.
  • No taxes on any earnings.
  • No taxes on any withdrawals.
  • When you withdraw money from the account, the contribution room available gets increased by the amount of the withdrawal, but in the following year.  That is so you can’t keep withdrawing and contributing during the same year.
  • You can transfer the TFSA between financial institutions – this will work the same way as transferring your RRSP – there will be no effect on your contribution room.
  • Like an RRSP, you can have multiple TFSA accounts, but the yearly maximums apply to all accounts added together.  So you can’t put $6000 in each TFSA, but rather all the contributions to the different TFSA accounts can’t add up to more than $6000 total.  
  • If you borrowed money to contribute to your TFSA or RRSP, the interest on that loan is not tax deductible.  
  • You can withdraw money from the TFSA and transfer it to a non-registered account or RRSP.