Tax Free Savings Account (TFSA) 101

A Tax Free Savings Account (TFSA) lets you grow your savings and access your money tax-free.


The 2008 Federal budget proposed the introduction of Tax Free Saving Accounts (TFSA), saving plans that can be used for any purpose at any time. A Tax Free Savings Account or TFSA, generally, is permitted to hold the same investments as an RRSP. This would include mutual funds, publicly traded securities, GICs, bonds, and certain shares of small business corporations.


Beginning January 2nd, 2009, Canadian residents who are individuals age 18 and older will be allowed to contribute up to the maximum TFSA annual limit which is indexed annually, to these registered accounts.

TFSA Annual Contribution Limits:

2016: $5,500 per year

2015:  $10,000 per year

2013 to 2014:  $5,500 per year

2009 to 2012:  $5,000 per year

RRSP vs. TFSA Account

Who  offer TFSA Accounts

Financial institutions currently eligible to issue RRSPs will be permitted to issue TFSA.  This includes: Canadian trust companies, Life insurance companies,  Banks, and Credit unions.

Will Contributions be Tax Deductible?

Contributions will not be tax deductible.

Income earned in the plans will not be a taxable event, and all withdrawals will not be included in the account holder’s income for the year.

Unused Contribution Room

Any unused contribution room and redeemed amounts (up to the maximum contribution allowed by CRA) will be carried forward in future years.  Just like RRSPs if an investor has never held a TFSA the available contribution room will accumulate from the inception of when the TFSA is available.

Example 1:  TFSAs were made available in 2009 with $5000 annual contribution room.  An investor does not open a TFSA until 2011, the investor’s available contribution room at time of setup is $15,000- $5000 from 2009, $5000 from 2010, and $5000 in 2011.

Example 2:  A request is received to redeem $2000 in 2010, the investor’s contribution room will be $7000 in 2011 ($5000 + $2000; available annual contribution amount and redeemed amount from previous year).

Note:  Any amounts withdrawn from TFSA in a year (which are not taxable events) will be added to the unused contribution room for the following year.

Excess Contribution Rules  Excess contributions will be subject to a tax penalty of one percent per month (1% per month).

The plan issuer is not responsible for control of the investor’s contribution limit.

Over contribution amount will be based on the plan issuer’s reporting.

CRA will be responsible to collect the penalty from the investor.

Note:  If, at any time in a calendar month, there is an excess TFSA amount in the account, the investor will be subject to a tax penalty of 1% per month on the highest excess amount for each month that the excess amount remains in the account.

TFSA Withdrawals

Depending on the type of investment held in a TFSA account, investors can withdraw any amount from the TFSA at any time. Withdrawing funds from a TFSA does not reduce the total amount of contributions already made for the year.

Withdrawals, excluding qualifying transfers and specified distributions, made from a TFSA in the year will only be added back to the TFSA contribution room at the beginning of the following year. Refer to the example below.


In 2010, Carl is allowed to contribute $5,000. He contributes $2,000 for that year.

2010 TFSA dollar limit         $5,000

2010 contributions              – $2,000

Unused TFSA contribution room available for future years         $3,000

In 2011, Carl does not contribute to his TFSA, but he makes a $1,000 withdrawal from his account. This withdrawal will not affect his TFSA contribution room for 2011. However, this withdrawal will not be added to his TFSA contribution room until 2012.

2010 unused TFSA contribution room             $3,000

2011 TFSA dollar limit         + $5,000

2011 unused TFSA contribution room available for future years               $8,000


Carl’s TFSA contribution room for 2012:

2011 unused TFSA contribution room             $8,000

2011 withdrawal  + $1,000

2012 TFSA dollar limit         + $5,000

TFSA contribution room at the beginning of 2012        $14,000


TFSA – Replacing Withdrawals

If an investor decides to replace or re-contribute all or a portion of their withdrawals into their TFSA in the same year, they can only do so if they have available TFSA contribution room. .

If an investor re-contributes but does not have contribution room, they will have over-contributed to their TFSA in the year. The investor will be subject to a tax equal to 1% of the highest excess TFSA amount in the month, for each month they are in an excess contribution position. Refer to the example below.


In 2010 and 2011, Sarah contributed $5,000 to her TFSA. In 2012, she makes another $5,000 contribution to her TFSA. Later that year, she withdraws $3,000 for a trip. Unfortunately, her plans changed and she cannot go. Since Sarah already contributed the maximum to her TFSA earlier in the year, she has no TFSA contribution room left.

If Sarah wishes to re-contribute part or all of the $3,000 she withdrew, she will have to wait until the beginning of 2013 to do so. The $3,000 will be added to her TFSA contribution room at the beginning of 2013.

If she re-contributes any of the withdrawn amounts before 2013, she will have an excess amount in her TFSA and will be charged a monthly tax of 1% on the highest excess TFSA amount for each month that an excess remains in the account.

Registered Retirement Savings Plan (RRSP) 101

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