Tax-Free Savings Account - TFSA

Definition of 'Tax-Free Savings Account - TFSA'


An account that does not charge taxes on any contributions, interest earned, dividends or capital gains, and can be withdrawn tax free. Tax-free savings accounts were introduced in Canada in 2009 with a limit of $5,000 per year, which is indexed for subsequent years. The contributions are not tax deductible and any unused room can be carried forward. This savings account is available to individuals aged 18 and older and can be used for any purpose.

Investopedia explains 'Tax-Free Savings Account - TFSA'


The benefits of a TFSA come from the exemption of taxation on any earned income from the investment. To illustrate this, let's take two savers: Joe and Jane. Joe puts his money in a investment making him 7% per year; Jane does the same but within a TFSA.

If both Jane and Joe make a $5,000 lump sum investment, they will each have $5,350 at the end of the year. Jane will be able withdraw all $5,350 without penalty, whereas Joe would be taxed on the $350 he earned.

A registered retirement savings account (RRSP) is for retirement, while a TFSA can be used to save for anything else. The tax-free savings account differs from a registered retirement account in two main ways:

1. Deposits in a registered retirement plan are deducted from your taxable income. Deposits into a TFSA are not tax deductible.
2. Withdrawals from a retirement plan will be fully taxed according to that year's income. Withdrawals from a TFSA are not taxed.

The TSFA addresses some of the flaws that many believe exist in the RRSP program, including the ability to return withdrawals to a TFSA at a later date without reducing unused contribution room.



comments powered by Disqus
Hot Definitions
  1. Joint Venture - JV

    A business arrangement in which two or more parties agree to pool their resources for the purpose of accomplishing a specific task. This task can be a new project or any other business activity. In a joint venture (JV), each of the participants is responsible for profits, losses and costs associated with it.
  2. Aggregate Risk

    The exposure of a bank, financial institution, or any type of major investor to foreign exchange contracts - both spot and forward - from a single counterparty or client. Aggregate risk in forex may also be defined as the total exposure of an entity to changes or fluctuations in currency rates.
  3. Organic Growth

    The growth rate that a company can achieve by increasing output and enhancing sales. This excludes any profits or growth acquired from takeovers, acquisitions or mergers. Takeovers, acquisitions and mergers do not bring about profits generated within the company, and are therefore not considered organic.
  4. Family Limited Partnership - FLP

    A type of partnership designed to centralize family business or investment accounts. FLPs pool together a family's assets into one single family-owned business partnership that family members own shares of. FLPs are frequently used as an estate tax minimization strategy, as shares in the FLP can be transferred between generations, at lower taxation rates than would be applied to the partnership's holdings.
  5. Yield Burning

    The illegal practice of underwriters marking up the prices on bonds for the purpose of reducing the yield on the bond. This practice, referred to as "burning the yield," is done after the bond is placed in escrow for an investor who is awaiting repayment.
  6. Marginal Analysis

    An examination of the additional benefits of an activity compared to the additional costs of that activity. Companies use marginal analysis as a decision-making tool to help them maximize their profits. Individuals unconsciously use marginal analysis to make a host of everyday decisions. Marginal analysis is also widely used in microeconomics when analyzing how a complex system is affected by marginal manipulation of its comprising variables.
Trading Center