How the Tax-Free Savings Account (TFSA) Actually Works

Now that the RRSP deadline has passed, many Canadians are realizing that they might have missed an opportunity to put away money, tax-free, and will have to wait until next year.  Fortunately, for those people who only think of RRSP’s as being used to reduce taxes owing for the first 2-months of the year, there are other options which they are about to learn about.

First off, Canadian taxpayers can contribute to their RRSP throughout the year – not just in the first 60-days of a new year, in order to reduce taxes – but TFSA’s are also a great way to put away money tax-free.

Much like it sounds, a Tax-Free Savings Account (TFSA) is a non-taxable account that helps Canadian taxpayers save for major financial undertakings. There are obviously some aspects of a TFSA which still causes confusion for many Canadians, so before anyone can open one, and begin contributing to it, there are a few things to keep in mind.

Introduced in 2009, the Tax-Free Savings Account offers Canadians a flexible way to save money.  Any money that is deposited in a TFSA is generally considered non-taxable, and that includes interest and capital gains earned through the account – which are both exempt from personal tax.

Any Canadian who is at least 18-years-old and who has a valid Social Insurance Number can open a TFSA.  A non-resident can open a TFSA, but the account will likely be subject to a 1% penalty for any contributions made while deemed a non-resident of Canada.

The TFSA is slightly different than the Registered Retirement Savings Plan.  Unlike with an RRSP – where you need to earn income, which opens up contribution “room” which you can then fill with investments – you do not need earned income to make contributions to your TFSA.  Contributing to a RRSP offers a tax deduction, in the form of a reduction in net income, whereas contributing to a TFSA does not provide a tax deduction.

The maximum amount which can be contributed to a TFSA is referred to as the TFSA contribution room, and any contribution made to a TFSA during the year counts towards contribution room except for direct transfers from one TFSA to another.  Over-contributions to a TFSA (exceeding the maximum amount allowable in a TFSA) are subject to a 1% penalty for each month the accounts contributions are over-exceeded.

Registered TFSA account holders are only able to contribute to their own TFSA accounts.  That being said, if a spouse or child is not contributing the maximum to their own TFSA, you can give them the money to contribute to their accounts without the income being attributed back to you.  It is important to take into consideration that any investments given to children or to a spouse / common-law partner, might incur taxable capital gains.

The TFSA has an annual contribution limit, which is the maximum amount that can be contributes to a TFSA in any single year.  Beginning in 2009, any qualifying Canadian resident started accumulating TFSA contribution room – a TFSA did not have to be opened in order to start accumulating contribution room.

Contribution Limits

The yearly TFSA contribution limit is;

• 2009 – $5,000
• 2010 – $5,000
• 2011 – $5,000
• 2012 – $5,000
• 2013 – $5,500
• 2014 – $5,500
• 2015 – $10,000
• 2016 – $5,500
• 2017 – $5,500
• 2018 – $5,500
• 2019 – $6,000
• 2020 – $6,000
• 2021 – $6,000
• 2022 – $6,000

The total room available in 2022 for someone who has never contributed and has been eligible for the TFSA since its introduction is $81,500, which means you could contribute a lump sum of $81,500.

How to find out your TFSA limit

There are a couple of ways to determine your TFSA limit.

1. If you turned 18 in a year after 2009, check out the maximum annual TFSA contributions either above on this very page or on the CRA’s site. Add together the maximum contributions from the year you turned 18 up to the present. If you took a withdrawal from your TFSA in the previous year, add that amount as well. Subtract the sum of all prior years’ contributions from that figure and that number is your current maximum contribution.
2. Log on to the CRA’s My Account from your computer, or us the MyCRA app from your smartphone and find the information there.  Here is some more detailed information on how to do just that:

• Go to the CRA My Account login
• Log in with your preferred method. If you’ve set up your bank as a sign-in partner, this is the simplest way to access your CRA account.
• Under the tabbed header, navigate to “RRSP and TFSA”
• Click “Tax-Free Savings Account (TFSA)”
• Click “Contribution Room”
• Click “Next” at the disclaimer
• Look for TFSA contribution room on January 1, 2022.’ This value is your most accurate contribution room since the date. Any contributions or withdrawals this year will not be included in this number.

3. Call the CRA’s Tax Information Phone Service (TIPS) at 1-800-267-6999.  Make sure before you call that you have all the authentication documents.