Tax-Free Savings Account

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Tax-Free Savings Account

Benjamin Teoh, CPA • Dec 22, 2021

The Tax Free Savings Account (“TFSA”), established in 2009, is an excellent way for individuals to save money and grow their wealth in a tax-free manner subject to certain conditions. Anyone who is over eighteen years of age (nineteen in some provinces) and has a valid Social Insurance Number can open a TFSA and immediately have access to the full TFSA limit.

TFSA Limit
As of January 1, 2022, the TFSA limit will rise by $6,000, and the aggregate limit in 2022 is $81,500. Any unused amounts in the year can be carried forward to the next year. You can have multiple TFSA accounts with different providers, but the total in these accounts cannot be more than the year’s limit. You or any of your authorized representatives can check your available TFSA room on CRA’s My Business Account or phone the CRA at 1-800-267-6999. Be sure not to overcontribute, otherwise the penalties are very harsh.

Contributions and Withdrawals

Contributions to the TFSA come from after-tax income, and unlike an RRSP, does not grant any tax deductions. On the other hand, withdrawals from the TFSA are also not taxed, and TFSA room is not lost after a withdrawal (but the re-contribution must be made in the next year or later). Banks, credit unions, insurance companies, and trust companies can open help you to open a TFSA account.

Income and Expenses

Investment income (interest, dividends, capital gains) generally is not taxed if generated in a TFSA. The TFSA is meant to be a saving tool however, and not for active trading. There are some cases where individuals who were much too active in their buying and selling were treated as running a business, and thus did not receive the tax-free treatment. On the flip side, any management or investment council fees incurred are not deductible.

Allowed Investments

The CRA provides a list of what investments are allowed in the TFSA (and other registered accounts) here. There are also prohibited investments, which refer to debt of shares in a corporation, trust, or partnership where the TFSA holder owns at least 10% of shares, or does not deal at arm’s length with the entity.

Usage

The TFSA can be used for both long- and short-term saving purposes. It is advantageous to invest within it rather than outside of it due to the tax-free nature. Additionally, it allows for tax-free withdrawal of funds as they are needed.