Source: MoneySense


Tax-free savings account is a bit of a misnomer. While you can use it for straightforward savings, think of it more accurately as an investment holding account to store things like mutual funds, exchange-traded funds (ETFs), stocks, bonds, guaranteed investment certificates (GICs), and, yes, plain old cash. While you do have to abide by the set amount of contribution room each year, any growth you earn on those investments will not affect your contribution room for the current year or years to come. Plus, the income earned is tax-free (more on that below). Any resident of Canada who is the age of majority in their province and has a valid social insurance number can open a TFSA. 

Is a TFSA really tax-free?

TFSA contributions won’t reduce your taxable income and generate a tax refund, unlike registered retirement savings plan (RRSP) contributions. (If you haven’t maxed out your RRSP, make sure to always do that before the deadline). However, where you do save on taxes with a TFSA is that the return you earn inside your TFSA is not taxable. That means income from things like interest, dividends or capital gains aren’t subject to income tax. Any income earned in the account—even when it is withdrawn—is generally tax-free. We say “generally” because foreign dividends, for example, may be subject to withholding tax, but the credit from the dividends doesn’t go on your tax return.

How does TFSA contribution room work?

Your TFSA contribution room is the maximum amount you can contribute to your TFSA for any given year. Your age affects the amount of contribution room you have. You begin accumulating contribution room from the year you turn 18 (as long as you are a resident of Canada), even if you didn’t file an income tax return that year or have a TFSA yet.

Your contribution room is the total amount of the following:  

  • The TFSA dollar limit for the current year
  • Any contribution room you have leftover from previous years
  • Any withdrawals made from your TFSA in the previous year 

The TFSA contribution limit for 2023 is $6,500. If you turned 18 before the year 2009 and have never contributed, your maximum lifetime TFSA contribution limit is $88,000. If you take money out of your TFSA, you get that room back on January 1 the following year. Just don’t go over your limit or make the mistake of thinking you get your TFSA room back for withdrawals right away. 

What happens if you overcontribute to your TFSA?

If you exceed your contribution limit, you’ll be subject to a 1% penalty tax per month. Luckily, this 1% tax only applies to the amount that’s been overcontributed, not the whole account value.  

What can you hold in a TFSA?

Qualified investments for TFSAs include: 

  • Mutual funds. A mutual fund pools together investments from many investors to purchase a basket of assets, usually stocks or bonds. Mutual funds can be actively or passively managed, and their fees vary accordingly.
  • Exchange-traded funds (ETFs). ETFs track, or mimic, various stock indexes, and their units trade on stock exchanges. You can choose from actively and passively managed ETFs.
  • Stocks (also called equities or securities) listed on a designated exchange. This generally includes stocks on the Toronto Stock Exchange, the New York Stock Exchange or NASDAQ exchange. There are other North American stock exchanges, though, and technically any stock that trades on a recognized stock exchange qualifies.
  • Bonds (both corporate and government-issued). Investors can buy individual bonds in an RRSP account, although it is more common to own bonds through a mutual fund or ETF.
  • Guaranteed investment certificates (GICs). GICs pay guaranteed interest rates for a specified term.
  • Cash (money). This includes literal cash, as well as money market mutual funds. 


This article was written by MoneySense Editors from MoneySense and was legally licensed through the Industry Dive Content Marketplace. Please direct all licensing questions to