Tax-Free Savings Account (TFSA)

What is a TFSA?

A Tax-Free Savings Account (TFSA) is an account available to Canadian residents who are 18 years of age or older, in which they can deposit, save, invest, accumulate interest on, and withdraw money tax-free.

Non-residents of Canada with an eligible SIN number may also open a TFSA, but must pay a 1% monthly tax on all contributions made while not a resident of Canada.

This account was created by the Canadian Federal Government in 2009, with an annual contribution limit of $5000, which has increased in the years since.

What can you do with your TFSA?

The TFSA allows for a broad range of investments, including stocks, bonds, GICs, mutual funds, and any other investment that can be made with a Registered Retirement Savings Plan (RRSP).

The contribution is not deductible from the account-holder’s income, but any interest dividends or capital gains earned from the account, as well as funds withdrawn from the account, are not taxable.

Excess contributions (including withdrawals re-contributed to the plan within the same year) and non-resident contributions are subject to a 1% monthly penalty tax. TFSA assets may be used as loan collateral, but no deduction may be claimed for interest paid on money borrowed for a TFSA contribution. The attribution rules do not apply to income earned in a TFSA from a contribution made by the account-holder’s spouse.

Following the death of an account-holder, his/her TFSA income becomes taxable unless his/her spouse or common-law partner is named as the successor of the account-holder or the account balance is transferred to a designated beneficiary (e.g., spouse, common-law partner, or child).