Tax-Free Savings Account (TFSA): Definition and Calculation

What Is a Tax-Free Savings Account?

A tax-free savings account (TFSA) is a Canadian savings account in which contributions, interest earned, dividends, and capital gains grow tax free. Money withdrawn from it is also tax free.

The money deposited in TFSAs is an after-tax contribution, meaning it's made with money that's already been taxed. Therefore, it doesn't reduce taxable income.

While it's called a savings account, a TFSA can hold investments that include mutual funds, securities, and bonds, as well as cash. This account is available to individuals age 18 and older in Canada and can be used for any purpose.

Key Takeaways

  • Tax-free savings accounts are a type of tax-advantaged account available to Canadian residents age 18 or older.
  • TFSAs let you save money on taxes because the gains on investments in the account are not taxed and withdrawals are tax free.
  • TFSAs have annual contribution limits called contribution room.
  • Contributions less than the annual limit leave a carryover amount that can be added to the next year's allowed contribution.
  • Carryovers are retroactive back to the year that TFSAs were created, 2009.

How Tax-Free Savings Accounts Work

Tax-free savings accounts were introduced in Canada in 2009. They were intended to help Canadians save and invest their money throughout their lives.

The TFSA account lets people save money for any reason, not simply for retirement. For example, you can save for a car, for your education, to buy a home, to set aside extra living expenses, and/or for retirement. What's more, you don't need to have earned income to contribute.

While there are exceptions, the money earned by investments in a TFSA is generally not taxed. Plus, savers maintain control over their TFSAs. They can make contributions, decide on investments, and withdraw funds whenever they wish without penalty.

When first introduced, they offered Canadians age 18 years and older the opportunity to make an after-tax contribution of up to C$5,000 for the year. In 2013, that annual limit was increased to C$5,500 and remained there through 2018, except for 2015, when the limit was increased to C$10,000 temporarily. In 2019, the contribution limit was set at C$6,000 and it remains the same for 2022.


The maximum amount that you're allowed to deposit to a TFSA is called your "contribution room." Importantly, for every year since 2009 that you were age 18 or older and a resident of Canada, you accumulate contribution room even if you haven't had an account open.

Any unused contribution room can be carried forward. For example, if you contributed the maximum amount each year until 2019, when you contributed only C$3,000 of C$6,000 available contribution room, you could contribute the C$3,000 carryover in 2020. That would have been in addition to the C$6,000 annual contribution limit for 2020 for a total contribution of C$9,000.

Likewise, if you hadn't made any contributions since 2016, your 2020 contribution room for the TFSA account would have been C$23,000: C$5,500 for each of the years 2017 and 2018 (C$11,000) and C$6,000 each for the years 2019 and 2020 (C$12,000).

The TFSA annual room limit is indexed to inflation and rounded to the nearest $500. Also, according to the Canadian Revenue Agency "qualifying transfers, exempt contributions and specified distributions are not considered in the calculation of contribution room."


Any contribution made to a TFSA beyond the maximum allowable amount is considered an over-contribution. The Canada Revenue Agency (CRA) will charge a tax penalty of 1% per month on the excess contribution until it is withdrawn.

Account holders should be aware that money withdrawn during the year doesn't reduce the amount already contributed. If you contribute additional funds in the mistaken belief that your withdrawal reduced your already-contributed amount, you may over-contribute and, as a result, owe tax on that amount.

Taxes can also be levied for other reasons, including for any contribution made by a non-resident and for prohibited or non-qualified investments acquired by the account.

TFSA Withdrawals

Withdrawal amounts open up more contribution room for you, but not in the year of the withdrawal. They are accounted for at the beginning of the following year.

For example, if Jane contributed C$5,500 for the tax year 2020, which had a contribution limit of C$6,000, that left C$500 in contribution room for that year. If she withdrew C$2,000, she wasn't allowed to replace that entire withdrawal amount in the same year because, again, her available contribution room was only C$500.

In this case, Jane can contribute an additional $C500 (the amount allowed by the remaining available contribution room in 2020). Then, at the beginning of 2021, she can add her withdrawal amount from 2020 to her contribution room for 2021.

Carryover Contribution and Withdrawal Calculation Example
TFSA contribution room in Jan. 2021   $6,000
Less 2021 contribution - $1,000
Remaining 2021 contribution room = $5,000
TFSA contribution room in Jan. 2022   $6,000
Plus 2021 carryover contribution room + $5,000
Plus a 2021 withdrawal + $1,500
Total 2022 TFSA contribution room = $12,500

TFSA Contribution Room Amounts

TFSA contribution room adds up for each year even if you haven't opened a TFSA. Earnings and changes in account value don't affect contribution room.

The annual limits in Canadian dollars since and including 2009 are:

2009-2012: $5,000

2013-2014: $5,500

2015: $10,000

2016-2018: $5,500

2019-2022: $6,000

Types of Investments Permitted

According to the Canadian government, the types of investments that are permitted in a TFSA include the following:

Check with a financial advisor or investment specialist to be sure that the investments you'd like to purchase align with the options permitted.

Pros and Cons of TFSAs


  • Everything your account earns grows without being diminished by taxes. In addition, all withdrawals are tax free.
  • You don't need earned income to contribute to a TFSA.
  • Unused contribution room carries over to subsequent years, letting you contribute more.
  • Carryover is retroactive back to 2009 or when you became 18 (if after 2009).
  • There are no required withdrawals; take out any amount at any time, without penalty.
  • Government program benefits aren't affected by the income you earn in a TFSA or the amount you withdraw from it.


  • Contributions aren't tax deductible.
  • Contributions that exceed the contribution room are taxed while they remain in the account.
  • Contributions made while you're a non-resident of Canada are taxed while they remain in the account.
  • If taxes are owed, a TFSA return must be filed by June 30 of the year following the year when the taxable event occurred.
  • TFSA funds aren't protected from creditors.

The income earned by investments in your TFSA doesn't impact your contribution room for current or future years.

How to Open a TFSA

Any person who is a resident of Canada, is age 18 or older, and has a valid Social Insurance number is eligible to open a TFSA.* Also, you can have more than one TFSA at any given time, but the total amount you contribute to all your TFSAs cannot be more than your available TFSA contribution room for that year.

To start saving with a TFSA:

  • Look for financial institutions that offer TFSAs (types include deposit, annuity, trust arrangement, and self-directed TFSA).
  • Apply for an account. You'll need to provide your Social Insurance number, date of birth, and valid identification.
  • Once your account is approved and open, the financial institution will register the account as a qualifying arrangement with the Canadian Revenue Agency.
  • Start funding your TFSA.

*You may open a TFSA if you're not a Canadian resident but any contribution made while still a non-resident will be taxed at 1% per month until removed from the account.


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

  1. Deposits made to an RRSP are deducted from your taxable income. Deposits into a TFSA are not tax-deductible.
  2. Withdrawals from a retirement plan are taxed as income. Withdrawals from a TFSA are not taxed.

How Does the Tax Advantage of a TFSA Compare to a Regular Investment Account?

Take two savers, Joe and Jane. At the beginning of the year, Joe puts C$6,000 in an investment account earning 7% per year. Jane contributes the same amount, but to a TFSA earning 7%. They will each have C$6,420 after a year, but Jane can withdraw all C$6,420 and owe no taxes on it, whereas Joe would be taxed on the earnings of C$420.

Are Contributions to a TFSA Tax Deductible?

No. You make contributions with money that's already been taxed. Therefore, they aren't deductible up front and can't reduce your taxable income. However, with few exceptions, all withdrawals from a TFSA are completely tax free.

What Is the Early Withdrawal Penalty for TFSAs?

There is no penalty for any withdrawal from a TFSA. That's one of its advantages. The Canadian government intended for this type of savings account to be used for any purpose whatsoever, and not simply for retirement. So, you can take withdrawals at any time during your life without being penalized for doing so.

The Bottom Line

Tax-Free Savings Accounts provide a terrific opportunity to save and invest for any purpose you choose. Account balances grow tax free. Withdrawals are tax free, as well. Plus, you can take withdrawals any time you wish to.

TFSAs also allow account holders to carry over unused portions of their contribution room to subsequent years. Plus, withdrawal amounts can be added back to the account in the following year. This adds to the allowed contribution amount, giving a saver even more opportunity to build the value of their account throughout their lives.

Article Sources
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  1. Government of Canada. "Tax-Free Savings Account (TFSA), Guide for Individuals."

  2. Government of Canada. "Contributions." 

  3. Government of Canada. "Indexation Adjustment for Personal Income Tax and Benefit Amounts."

  4. Government of Canada. "Types of Permitted Investments."

  5. Government of Canada. "Registered Retirement Savings Plan (RRSP)."

  6. Government of Canada. "The Tax-Free Savings Account."

  7. Government of Canada. "Making Withdrawals."