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What is a Tax-Free Savings Account (TFSA)?

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The Canadian government introduced the Tax-Free Savings Account (TFSA) in 2009 to help Canadians save for their future. A TFSA is a type of savings account that allows you to save and invest your money without having to pay any taxes on the earnings. Any earnings on your investments in your TFSA, such as interest, dividends, or capital gains, are not taxed. However, the contributions you make to your TFSA are not tax deductible. There is a maximum amount that you can contribute to your TFSA in a year, known as the TFSA contribution limit. As of 2024, the annual contribution limit is $7,000, and the maximum lifetime contribution limit is $95,000. The limit is adjusted annually based on the consumer price index.

A registered account, such as a TFSA or RRSP (Registered Retirement Savings Plan), is registered with the Canada Revenue Agency. This allows you to receive certain tax benefits. In the case of a TFSA, you do not have to pay any tax on the returns you earn on your investments. This means your investments can grow tax-free in a TFSA.

Unlike RRSP contributions that are tax-deductible, TFSA contributions are made from your post-tax income. Meanwhile, RRSP withdrawals are considered taxable income in the year that the withdrawals are made, but no tax is required to be paid on TFSA withdrawals.

The Canada Revenue Agency allows you to hold the following in a TFSA:

• Cash
• Guaranteed investment certificates (GICs)
• Mutual funds
• Bonds
• Securities listed on a designated stock exchange, such as Stocks and ETFs
• Shares of small business corporations
• Gold and silver (Only produced by the Royal Canadian Mint or a recognized metal refiner by the London Bullion Market Association)

You can learn more about TFSA investments on our TFSA investment options page.

TFSA doesn’t allow for some common types of investments like:

• Land and Property: You cannot buy land or property and hold it as a TFSA investment. However, you can invest in real estate through your TFSA by purchasing REIT (Real Estate Investment Trust) ETFs.

• Cryptocurrency: You cannot directly buy cryptocurrencies, such as Bitcoin or Ethereum, in your TFSA or RRSP. However, you can hold a cryptocurrency exchange-traded fund (ETF) that is listed on a designated stock exchange. One example of that is the Purpose Bitcoin ETF (BTCC), which is listed on the Toronto Stock Exchange. A disadvantage of cryptocurrency ETFs is that they charge a fee in order to operate the fund. In the case of the Purpose Bitcoin ETF, the management expense ratio (MER) fee is 1.00%.

• Day Trading: TFSAs are meant for investing and saving, not for trading. Frequently trading in your TFSA to generate tax-free income can result in the CRA considering your account to be carrying on a business. This will cause your TFSA to lose its tax-free status and result in tax being payable on all earnings and capital gains.

• Futures Contracts, Options that Require Margin and Shorting Stocks: Futures contracts cannot be held in a TFSA because they involve the possibility of losing more money than you put in. The CRA does not allow TFSAs to borrow money, which is also why you can’t trade on margin with a TFSA. Due to leverage, futures have margin requirements. Similarly, options requiring margin cannot be held in a TFSA, and you cannot short stocks in a TFSA.

Many banks, credit unions, and brokerages offer TFSAs. You can open a TFSA online, over the phone, or by visiting a branch. The following are some key facts about having a TFSA account.

• Number of Accounts: There is no limit to the number of TFSAs that you open. This can be across multiple banks or brokerages as well.

• Joint Account: You cannot open a joint TFSA with someone else. You also can’t directly contribute to someone else’s TFSA, such as your spouse. However, you can give them money so that they can contribute it to their own TFSA. This is known as income splitting. You won’t receive any tax deduction, but income splitting with a TFSA allows the lower-income spouse to fully use their contribution room. This allows you and your spouse to fully use and max out your TFSA to grow savings tax-free.

• Basic Requirements: To open a TFSA, you must be a Canadian resident with a Social Insurance Number (SIN) and have reached the age of majority in your province or territory.

• Age of Majority: In all cases, you cannot open a TFSA if you are under the age of 18. If you are in a province or territory where the age of majority is 19, you do not lose out on your contribution room! The annual contribution limit for the year that you turned 18 will carry over to the year that you turned 19.

The table below shows the age of majority in Canadian provinces and territories. Look for the province or territory that applies to you to find out when you can open a TFSA.

There are limits to how much money you can contribute to a TFSA. There are both annual and lifetime contribution limits. If you don’t use up your annual contribution limit, then the remaining amount is carried forward to future years. The 2024 TFSA contribution limit is $7,000, meaning you can contribute up to $7,000 to your TFSA in the year. The 2023 TFSA contribution limit was $6,500, and the TFSA limit was $6,000 from 2019 to 2022.

Your total lifetime contribution room is the sum of the contribution limits for all the years that you have been eligible, and you become eligible when you turn 18 years of age. If you turned 18 in 2009 or earlier, your cumulative contribution limit would be $95,000 in 2024. If you turn 18 in 2024, you could open a TFSA and contribute up to $7,000 this year. The annual TFSA contribution limit has also changed over the years since it was introduced in 2009.

For newcomers in Canada, the lifetime contribution limit is calculated from the year they became a Canadian resident. For example, if you became a Canadian resident in 2023, your TFSA contribution limit is $13,500 ($6,500 for 2023 and $7,000 for 2024). You can use our TFSA contribution limit calculator to easily find out how much you can deposit into a TFSA. You can also track your remaining TFSA contribution room through your CRA account.

You must pay a TFSA over-contribution penalty if you exceed your contribution limits. The penalty is a 1% tax on the highest excess TFSA amount for each month that the contribution stays in excess.

For example, let’s say that you over-contributed to your TFSA by $10,000. The 1% tax penalty would be $100 per month. If your contribution remained excess by $10,000 for a year (12 months), then you would have to pay $1,200 in taxes.

TFSA withdrawals are not considered to be taxable income. This also means that it won’t affect Old Age Security (OAS), Guaranteed Income Supplement (GIS), Employment Insurance (EI), Canada child benefit (CCB), the goods and services tax/harmonized sales tax (GST/HST) credit, and other income-based government benefits.

While you can withdraw from your TFSA at any time, you might be restricted by your investment type. For example, TFSA GICs might lock you in for a certain period of time.

Your financial institution will report your TFSA contributions and withdrawals directly to the CRA. You do not report your TFSA activity, including earnings, contributions, and withdrawals, on your tax return. However, you may be required to file a Tax-Free Savings Account (TFSA) return if you contributed an excess amount over your contribution limit, if you were a non-resident, or if you held non-qualified or prohibited investments.

Most institutions charge a fee for transferring your TFSA to another financial institution. TFSA transfer-out fees are usually $50. This would deregister your TFSA account and transfer out your holdings to a new TFSA account at the target financial institution.

While you can avoid paying transfer-out fees by withdrawing cash and then depositing it back into your new TFSA account, it involves using up your TFSA contribution room for that year. If the amount that you wish to transfer is more than your TFSA contribution room, then you would need to wait until the following year in order to complete the full amount of the transfer. This also requires you to sell your holdings, which might result in you selling stocks at an unfavourable time or price. Trading commissions and fees when liquidating your positions will also add up.

Some brokerages may offer rebates that cover the cost of transfer-out fees. For example, Questrade covers the cost of transfer fees, up to $150, when you transfer a registered account to Questrade. RBC Direct Investing rebates up to $200 if you transfer $15,000 or more to RBC from another financial institution. The table below shows the transfer-out fee rebates offered by some Canadian banks and brokerages.

• Investment Losses: Investment losses in your TFSA will permanently reduce your lifetime contribution room. That's because you initially contributed to your account, but you cannot withdraw the same amount back out. Selling stocks for a loss in a TFSA will lock in your capital loss.

  For example, let’s say that your cumulative contribution room was $81,500 in 2022, and you fully used up your contribution room. Suppose you the full amount in a certain stock, and the stock’s value goes to zero. You then sell the stock for $0. The amount that you can withdraw from the TFSA is $0. Since the annual contribution limit for 2023 is $6,500, you would only be able to contribute $6,500 next year, not the $81,500 that you have lost.

• Investment Gains: The opposite would occur if the value of your TFSA grows. Gains in your TFSA will increase your TFSA’s contribution room should you withdraw more than your original cumulative contributions. For example, let’s say that you initially contributed $10,000. With a diverse portfolio of REITs and ETFs, the value of your TFSA increases to $15,000. That represents a $5,000 capital gain. You sell your REIT and ETF holdings and withdraw $15,000 from your TFSA account. Since the $15,000 withdrawn this year will be added to your next year’s contribution room, your lifetime TFSA contribution room has effectively grown by an additional $5,000.

TFSA holders can designate a successor holder or beneficiaries in their TFSA contract or will. It should be noted that there is no inheritance tax in Canada. When the owner of the TFSA dies, the successor holder or the beneficiary will receive the TFSA tax-free. However, there are differences between these two designations.

• Successor Holder: The successor holder will become the new holder of the TFSA. The TFSA remains tax-free, and this includes any earnings after the date of the original owner’s death. The successor will now have two TFSAs. The successor can either choose to keep the inherited TFSA open or consolidate TFSAs without affecting their TFSA contribution room. Non-residents can still be designated as a successor; however, they must apply for an individual tax number (ITN).

• Designated Beneficiary: This can include a survivor who is not named as a successor holder. Only the earnings in the TFSA that occurred during the life of the TFSA owner will remain tax-free and earnings that occur after the date of the TFSA owner's death become taxable. The amount that the beneficiary can withdraw tax-free is the fair market value of the TFSA at the time of the owner’s death.

  A survivor can also contribute the amount withdrawn from the deceased's TFSA into their own TFSA. This contribution can be designated exempt, meaning it won't affect their own contribution room. However, it must be completed before the end of the following year of the original account holder's death.

If there is no successor or beneficiary, then the account holder's estate will be distributed according to the will.

The Canada Revenue Agency publishes statistics of TFSAs. According to the CRA, 17.8 million Canadians had a TFSA in 2022, and there were 28.2 million TFSAs, meaning the average Canadian holder had 1.6 TFSAs.