A Tax-Free Savings Account, more commonly known as a TFSA, is a savings account that can hold cash as well as investments. The TFSA was introduced to Canadians in 2009. Any Canadian over the age of 18 who has a SIN number can open a TFSA.
How a TFSA Works
TFSAs work similarly to other savings accounts, with a few important differences:
First and foremost, unlike other savings accounts, the TFSA can hold investments such as stocks, bonds, mutual funds, and GICs. The growth from these investments is exempt from tax so your TFSA can earn interest, dividends, or capital gains without limitation, and without a tax bill. And any growth from investments will not be counted against your contribution room in future years. Withdrawals from TFSAs are tax-free to the holder of the account.
Secondly, there are limits to how much you can deposit into the account.
Understanding Contribution Limits
The annual maximum someone can contribute to a TFSA is determined each year by the CRA (see table below). Canadians start earning their contribution room at age 18 and each person is subject to the same contribution limits, regardless of how much their income is. The contribution limit for 2023 is $6,500 and the allowable lifetime limit, if you have never contributed to a TFSA, is $88,000.
| Year | TFSA Dollar Limit | Cumulative Total |
| 2023 | $6,500 | $88,000 |
| 2022 | $6,000 | $81,500 |
| 2021 | $6,000 | $75,500 |
| 2020 | $6,000 | $69,500 |
| 2019 | $6,000 | $63,500 |
| 2018 | $5,500 | $57,500 |
| 2017 | $5,500 | $52,000 |
| 2016 | $5,500 | $46,500 |
| 2015 | $10,000 | $41,000 |
| 2014 | $5,500 | $31,000 |
| 2013 | $5,500 | $25,500 |
| 2009-2012 | $5,000 | $20,000 |
For example, if someone turned 18 in 2016, and they are just opening a TFSA in 2023, they would be able to deposit $47,000 into it.
Any withdrawals from a TFSA are added to the contribution limit in the following year. This means that you can recontribute the amount you withdrew in a previous year. It is allowable to have more than one TFSA in Canada, so extra attention to contribution limits in important if you have multiple accounts.
Therefore, someone’s total contribution limit would be the total of the dollar limit for the current year plus unused room from previous years plus withdrawals made in the previous year.
Advantages
TFSAs are suitable for both short- and long-term investing goals due to the ease of withdrawals. The main advantage of a TFSA is that it allows investors to benefit from tax-free growth of their investment. This is an invaluable tool that investors have available to them to grow their wealth. While there are no tax breaks from contributing to the TFSA, investors will benefit over time from tax-free growth in and withdrawals from their account.
Limitations
The contribution room is limited and there are stiff penalties for overcontribution. It is important to track how much you are putting into your TFSA every year to ensure you are not going over your allowable deposits. (You can find you current contribution room on your myCRA account.)
The Bottom Line
TFSAs are one of the most effective financial tools Canadians have available to them and should not be reduced to simple savings accounts. They can provide significant investing opportunities and tax advantages to help you reach your financial goals.
