Tax-Free Savings Account (TFSA)

For the years 2009 to 2012 inclusive, every Canadian resident individual (other than a trust) 18 years of age or older has been able to contribute $5,000 a year to a TFSA. Commencing with the 2013 calendar year, the contribution limit increased to $5,500 per year. The limit will continue to increase in increments of $500 in the future as it is indexed to inflation, to the nearest $500. Subject to certain exceptions, a TFSA is generally permitted to hold the same types of investments as an RRSP.

Unlike RRSPs, you will not obtain a tax deduction for contributions to a TFSA. However, you will not include in your income for tax purposes any income, losses or gains from investments held within a TFSA, or amounts withdrawn from it. The amounts withdrawn from a TFSA will also not be included in determining your eligibility for income- tested benefits or credits, such as the medical or age credit (see topics 79 and 83) or OAS clawback (see topic 72). If you do not contribute to a TFSA in one year, the amount can be carried forward indefinitely to future years. Any amounts withdrawn from a TFSA can also be recontributed without impacting your contribution room. For example, if you contribute $5,000 in each of the years 2009 to 2012 inclusive, $5,500 in each of 2013 and 2014 and then withdraw $6,000 in 2015, you’ll be able to contribute $17,000 to your TFSA in 2016 ($5,500 contribution room in each of 2015 and 2016 plus the $6,000 withdrawn in 2014).14 Interest on money borrowed to invest in a TFSA is not deductible.

If you can afford it, this plan can prove to be a worthwhile savings vehicle. A TFSA can also provide you with some interesting opportunities to manage your retirement income.

Tax tip: If your spouse cannot afford to contribute to a TFSA, you can contribute to your spouse’s TFSA as well as your own without any negative tax consequences. This will allow you to reduce your family’s total tax bill.

Tax tip: Although amounts withdrawn from your TFSA can be recontributed without impacting your contribution room, the recontribution should generally not be made until the year following your withdrawal from the account. If you recontribute the amount withdrawn in the same year, you could be subject to an overcontribution penalty.

Your tax adviser can assist you in determining what savings vehicle is the best option for you, given your particular circumstances.


14 This assumes that the annual TFSA limit remains at $5,500.