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What is a TFSA?


A Tax-Free Savings Account (TFSA) is a tax-shelter for your investments. Despite what the name implies, a TFSA is more than just a simple savings account—you can hold a wide range of investments and securities inside a TFSA, including cash, stocks, bonds, mutual funds, and guaranteed investment certificates (GICs). The reason it’s called a Tax-Free Savings Account is because all the earnings generated by the investments in your TFSA aren’t taxed, that is, your savings are allowed to grow tax-free.

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How does a TFSA work?

Every year, a certain amount of contribution room is made available to you. This is known as the annual contribution limit. You start accumulating contribution room from the year you turn 18, even if you haven’t opened a TFSA by that time. If you don’t contribute the maximum amount that you’re allowed in a given year, your unused contribution room is carried forward to future years.

You can withdraw money from your TFSA at any time completely tax-free (you don’t have to report withdrawals as income when you file your taxes). What’s more, you can recontribute whatever funds you’ve withdrawn back into your TFSA starting from the next calendar year.

Example: TFSA Contribution Room
$5,500 TFSA Contribution Limit for 2017 + $2,000 Unused Contribution Room from 2016 + $1,000 Withdrawls made from your TFSA during 2016 = $8,500 TFSA Contribution Room

TFSA Benefits

The greatest benefit of the TFSA is the tax-free growth that it provides to your investments. This allows your savings to grow much faster than they would elsewhere. For example, if you’re invested in a stock and it doubles in value, holding it in your TFSA means you wouldn’t have to pay any capital gains tax on your earnings. If this stock pays out a dividend, you wouldn’t be taxed on that either. This rule applies to all investments held in a TFSA.

This benefit also makes the TFSA an extremely flexible savings vehicle: You can use it to save up for a car, for the down payment on a house, to go on a trip, or even as an emergency fund.

Another benefit of the TFSA is that you don’t need to earn any income to contribute to it—you start collecting contribution room regardless of your employment status. In fact, you earn TFSA contribution room from the day you turn 18 even if you don’t open an account.

Since withdrawals from your TFSA don’t count as taxable income, then they don’t affect your eligibility for government tax benefits such as Old Age Security and the Guaranteed Income Supplement.

How to open a TFSA

In order to open a TFSA, you need to have a valid Social Insurance Number (SIN) and you need to be at least the age of majority in the province or territory that you live in.

That means if you live in Alberta, Manitoba, Ontario, Prince Edward Island, Québec, or Saskatchewan, you need to be 18 or older.

If you live in British Columbia, New Brunswick, Newfoundland, Nova Scotia, Northwest Territories, Nunavut, or Yukon, you have to be at least 19 years old to open a TFSA.

If you live in a province or territory where the age of majority is 19, you still start accumulating contribution room from the year you turn 18, so you don’t have to worry about missing out on an entire year’s worth of TFSA contribution room.

If you meet these criteria, you’re ready to open a TFSA, which are issued by most financial institutions. Here are some examples of places where you can open a TFSA:

  • Banks
  • Credit unions
  • Trust and loan companies
  • Insurance companies
  • Caisses populaires

You can have as many TFSAs open in your name as you’d like, as long as between all of your accounts you don’t contribute more than your limit in a year.

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