A Tax Free Savings Account (TSFA) is a registered savings vehicle that allows you to earn investment income tax-free inside the account. Canadians aged 18 and older, with a valid SIN (Social Insurance Number), can contribute up to $5,500 every year in a TFSA. Your TFSA can hold any combination of eligible investment vehicles, such as cash, stocks, bonds, GICs and mutual funds. You do not have to pay taxes on earnings within the account (including interest, dividends or capital gains) or on money you withdraw from the TFSA. Contributions to the account are not tax-deductible, however, unlike contributions to your RRSP.
Where can I open a TFSA?
You can open an account at most financial institutions, including banks. Talk to your bank or look online at your bank’s website.
What can I use my TFSA savings for?
You can withdraw funds from the TFSA at any time for any purpose. TFSA accounts are very popular since they can be used for so many different kinds of savings goals. Here are a few examples:
- Short-term savings for a vacation or home renovation in the near future.
- A place to hold your non-registered investments so that they continue to grow tax-free.
- Long-term savings for a car or a home.
- A place to hold extra pension income after you retire.
What are the contribution limits?
The TFSA contribution room is made up of:
Your contribution room began building the first year TFSAs were offered in 2009 and any unused contribution room can be carried forward to future years. For example, if you opened your TFSA in 2013, your contribution room is $41,000 ($5000 for 2009, 2010, 2011 and 2012, plus the $5500 limit for 2013 and 2014, plus the $10,000 limit for 2015 provided you were 18 or older in 2009).
How do withdrawals from my TFSA affect my contribution room?
If you withdraw money from your TFSA, your annual contribution limit increases by the amount withdrawn – but not until the following calendar year. For example, if you withdraw $1000 from your TFSA in 2012, in 2013, $1000 will be added to your contribution room.
It’s important to remember not to exceed the maximum contribution room that you have for the year as you will be taxed one per cent a month on the highest excess amount for that month until you remove it from the TFSA.
It is also important to understand that any withdrawals from the account during the year do not increase your contribution room for that year. For example, if your maximum allowable contribution for 2012 was $5000 and you contributed that $5000 in January 2012 and then withdrew $2000 in April 2012, you could not re-contribute that $2000 during 2012 without incurring the one per cent per month tax since you have already made the maximum contribution. This $2000 would be added to your contribution room for 2013. The Canada Revenue Agency (CRA) has two more examples of this important point on their website here.
If you wish to move your TFSA to a different financial institution be sure to directly transfer your funds to your other TFSA. Qualifying transfers will not affect your contribution room. If you withdraw your funds and then recontribute them to another TFSA, however, both of your contributions will be counted towards your annual contribution limit. This may result in an over-contribution which will be subject to the one per cent per month tax on the excess amount. You can find out more about qualifying transfers here.
The CRA will provide details of your contribution room annually on your Notice of Assessment that you receive once you have filed a tax return.
Will a TFSA affect my government benefits?
No. Neither income earned in a TFSA nor withdrawals will affect your eligibility for federal income-tested benefits such as Old Age Security (OAS) benefits, guaranteed income supplement (GIS) or Employment Insurance (EI) benefits or credits such as the goods and services tax credit/harmonized sales tax credit, or the age credit.
The rules governing registered products such as TFSAs can be complicated. Banks and other financial institutions explain the rules governing registered products to you when you open an account. If you have any questions, visit the Canada Revenue website or talk to your financial institution.
While financial institutions provide advice to their clients, a financial institution can never be certain of the total amount of your TFSA contributions because you may have TFSAs at more than one financial institution. That’s why it’s important to carefully track your contributions and withdrawals from your TFSA to ensure that you stay within your annual contribution limit.
For more information about the Tax Free Savings Account, visit the The Canada Revenue Agency.
Source: Department of Finance Canada / Canada Revenue Agency