TFSA basics

Regardless of what you are saving for, a Tax-Free Savings Account (TFSA) is a great way to save for any financial goal – a long-term goal such as retirement or a short-term goal such as a car or a vacation.

Did you know if you’ve never opened a TFSA, you can contribute up to $75,500 today?*

Since 2009, TFSAs have represented a unique way for Canadians to save money and pay less tax. Any Canadian resident with a social insurance number who has reached the age of majority in their province can open a TFSA and save up to $6,000 every year.* They are called “savings accounts,” but TFSAs can hold many different types of investments, including all Fidelity Funds.

To get the most out of a TFSA, it should be part of your overall financial plan.

How TFSAs can help achieve investment goals

There are two ways a TFSA can help you grow your savings faster than an ordinary savings account or a non-registered investment.

1. Tax-free earnings

Investments grow tax-free while inside the TFSA, so you don’t have to include any earnings on your Canadian income tax return.

2. Tax-free withdrawals

Withdrawals can be made from the TFSA at any time for any purpose. Withdrawals are generally not considered as taxable income and are not subject to tax.

See the difference a TFSA can make.

Whether you’re saving for a car, a house, a cottage or a comfortable retirement, the additional savings benefit of a TFSA can be significant in both the short and long term. The following table illustrates the difference between savings in a TFSA compared with non-registered investment over five-, ten-, 15- and 20-year periods.

Savings accumulation comparison of a TFSA vs. non-registered investment account

TFSA - graph comparing accumulation of  TFSA vs non registered account
Assumptions: Rate of return of 6%, marginal tax rate of 50% for interest and 25% for capital gains, distributions reinvested, distribution yield of 2.0%, distribution composed of 50% interest and 50% capital gain, initial contribution of $6,000 and contributions increase in $500 increments based on a 2% inflation rate. Contributions were made at the beginning of the period. Unrealized capital gains were taxed at the end of the holding period. This assumption ignores contributions from prior years.

Six key TFSA facts

1. Every year, your TFSA has contribution room limits. Since 2009, the Canadian government has set a maximum amount that qualified Canadians can contribute to their TFSA every year, regardless of income.

2. Unused TFSA contribution room can be carried forward indefinitely to future years. If you didn’t contribute the maximum amount in a given year, you’re allowed to “catch up” in the future, within the overall limits of your TFSA contribution room limits.

3. At any point, if you contribute more than the total allowed contribution limit, the over-contribution amount will be subject to a tax penalty.

4. Withdrawals are not considered as taxable income and will generally not trigger government benefit clawbacks or affect tax credits.

5. Any withdrawals from your TFSA are added to your TFSA contribution room limit in the following year, so you can recontribute the amount you withdrew in a future year.

6. You can have more than one TFSA, but be careful that your combined accounts do not create an over-contribution; you cannot over-contribute without a tax penalty. You can check your TFSA contribution limits by going to the CRA website and log in to My Account.

TFSA contribution room limit by year from 2009 to 2021*

The following chart shows the contribution limits for each year that the TFSA has been available.

Year Contribution limit Year Contribution limit
2009 $5,000 2016 $5,500
2010 $5,000 2017 $5,500
2011 $5,000 2018 $5,500
2012 $5,000 2019 $6,000
2013 $5,500 2020 $6,000
2014 $5,500 2021 $6,000
2015 $10,000    
Total $75,500

Choosing between a TFSA and an RRSP

If you are looking to save in the most tax-efficient way, TFSAs and RRSPs can both be an effective option to achieve your savings goals. However, each plan has its own distinctive features. RRSPs can be an excellent complement to your TFSA.

What is the primary purpose? Short-term general savings or long-term retirement savings Retirement savings
Are contributions tax-deductible? No Yes
Are contributions made with after-tax dollars? Yes No, contributions are made with pre-tax dollars
What is the tax treatment of earnings inside the account? Tax free Tax deferred
Can I make a withdrawal at any time? Yes Yes, but withdrawals are taxed as income
Is there tax on withdrawals? No Yes, but withdrawals are taxed as income
Do withdrawals increase contribution room? Yes1 No
Does unused room carry forward? Yes Yes
Is there an age limit? No Yes, to a RRIF or life annuity by age 71
Do income attribution rules apply? No Generally no, but may apply to withdrawals from a spousal RRSP
Do withdrawals affect income-tested government benefits and tax credits? No, generally withdrawals are not included in taxable income Yes, generally withdrawals are included in taxable income
What is the contribution room limit/formula? $6,000 per year regardless of income (2020) plus, available TFSA contribution room 18% of earned income to a maximum of $27,230 (2020), plus unused RRSP deduction room



* Restrictions apply: Starting in 2009, TFSA contribution room accumulates every year, if at any time in the calendar year you are the age of majority or older and a resident of Canada. In British Columbia, Newfoundland and Labrador, Nova Scotia and New Brunswick, the age of majority is 19, and a TFSA may not be opened until then. However, you will accumulate contribution room from the time you are 18. TFSA contribution limits are determined by indexing $6,000 to inflation for each year after 2009 and rounding the result to the nearest $500.

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