Tax Free Savings Account (TFSA)

Tax Free Savings Account (TFSA)

Saving just got a whole lot easier

Tax-Free Savings Account (TFSA) is a flexible, registered general-purpose savings vehicle that allows Canadians to earn tax-free investment income to more easily meet lifetime savings needs.

A Tax-Free Savings Account (TFSA), is an account where you can save or invest up to $5,500 a year.1 Unlike other types of savings, you’re not taxed on the income you earn. It’s a great way to save for your short or long-term goals; because it lets your savings grow – tax-free.

The TFSA complements existing registered savings plans like the Registered Retirement Savings Plans (RRSP) and the Registered Education Savings Plans (RESP).

How the Tax-Free Savings Account Works

  1. Canadian residents age 18 or older can contribute up to $5,500 annually to a TFSA.
  2. Investment income earned in a TFSA is tax-free.
  3. Withdrawals from a TFSA are tax-free.
  4. Unused TFSA contribution room is carried forward and accumulates in future years.
  5. Full amount of withdrawals can be put back into the TFSA in future years. Re-contributing in the same year may result in an over-contribution amount which would be subject to a penalty tax.
  6. Choose from a wide range of investment options
  7. Contributions are not tax-deductible.
  8. Neither income earned within a TFSA nor withdrawals from it affect eligibility for federal income-tested benefits and credits, such as Old Age Security, the Guaranteed Income Supplement, and the Canada Child Tax Benefit.
  9. Funds can be given to a spouse or common-law partner for them to invest in their TFSA.
  10. TFSA assets can generally be transferred to a spouse or common-law partner upon death.

 

The difference between TFSAs and RSPs

  TFSA RSP
Primary purpose Saving for any purpose Retirement savings, home purchase or education.
Annual contribution limit $5,5001 PLUS amounts withdrawn in previous years2 18% of previous year’s earned income (maximum limits apply), less pension adjustments
Contributions Not tax-deductible Tax-deductible
Unused contribution room Carried forward Carried forward
Growth Tax-free Tax-deductible
Withdrawals You’re not taxed on withdrawals.

They do not affect federal income-tested government benefits such as Old Age Security

Money taken out is taxed as income at your marginal rate.

Withdrawals are counted as income and may affect federal income-tested government benefits such as Old Age Security

Withdrawn amounts Added to contribution room in future years Contribution room is lost for amounts you withdraw
Plan maturity None; no upper age limit on contributions End of year when you turn 71
Spousal plan n/a You can contribute directly to a spousal RSP
Age minimum 183 N/A


1 Annual contribution limit for 2016 is $5,500. Annual contribution limit from 2009 to 2012 was $5,000. Annual contribution limit from 2013 to 2014 was $5,500. Annual contribution limit for 2015 was $10,000. Annual TFSA contribution limit subject to change by the federal government.
2 The amount you withdraw can be re-contributed to your TFSA the following year or years without impacting your contribution room.