What is a TFSA
A Tax-Free Savings Account (TFSA) is a registered account administered by the Canada Revenue Agency (CRA). Investment income earned within a TFSA (interest, dividends, capital gains) is generally tax-free, and withdrawals are usually tax-free as well.
Who can open a TFSA
According to the CRA, any individual (not a trust) who is at least 18 years old can open a TFSA with an eligible issuer, such as a trust company, a licensed annuities provider, a member of the Canadian Payments Association, or a credit union.
How contribution room is calculated
TFSA contribution room accumulates starting in 2009. Each year, the government sets a TFSA dollar limit. Your available contribution room is calculated as:
- Unused contribution room from the previous year
- Plus withdrawals made in the previous year (excluding qualifying transfers or specified distributions)
- Plus the TFSA dollar limit for the current year (if you are a Canadian resident for the entire year)
- Minus contributions made in the current year (excluding qualifying transfers or exempt contributions)
If you are not a Canadian resident in a given year, your limit for that year is nil.
What happens if you over-contribute
If you contribute more than your available room, the excess is subject to a tax of 1% per month on the excess amount until it is withdrawn or your room increases.
Withdrawals and room recovery
Withdrawals from a TFSA are generally tax-free, but the withdrawn amount is added back to your contribution room only in the following year. If you withdraw and re-contribute in the same year, you may exceed your room unless the re-contribution is a qualifying transfer or exempt contribution.
Eligible investments
TFSA investments are generally similar to those allowed for RRSPs, including cash, GICs, government and corporate bonds, mutual funds, and securities listed on a designated stock exchange. Real property (except in certain cases) is not eligible.
Transfers and death
You can transfer funds directly from one TFSA to another, or to your current or former spouse's TFSA under a separation agreement. If the holder dies, a survivor may designate certain payments as exempt contributions using Form RC240.
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