What Is a Tax-Free Savings Account?

The Tax-Free Savings Account (TFSA) is an account that does not apply taxes on any contributions, interest earned, dividends, or capital gains, and can be withdrawn tax free. This savings account is available to individuals aged 18 and older in Canada and can be used for any purpose.

Understanding Tax-Free Savings Accounts (TFSA)

Tax-free savings account (TFSA) was introduced in Canada in 2009 with a limit of $5,000 per year, indexed for subsequent years. In 2013, the contribution limit was increased to $5,500 annually and remained so through 2018, except in 2015 when the limit was $10,000. As of 2019, the contribution limit was raised to $6,000. The contributions are not tax-deductible and any unused room can be carried forward.

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. At the beginning of the year, Joe puts his money in an investment account making him 7% per year; Jane does the same but within a TFSA. If both Jane and Joe deposit a $6,000 lump sum investment, they will each have $6,420 at the end of the year. Jane will be able to withdraw all $6,420 with no tax penalty, whereas Joe would be taxed on the $420 he earned in capital gain.


While a registered retirement savings plan (RRSP) account is for retirement purposes, a TFSA can be used to save for anything. 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 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.

TFSA Contributions

Any contribution amount not made to the TFSA during a year can be carried forward to the next year. For example, if you’ve contributed the maximum limit diligently until 2017 when you contributed only $3,000, you can still contribute $3,000 in 2019 in addition to the $6,000 annual contribution limit for 2019. Likewise, if you haven’t made any contribution since 2016, your 2019 contribution room for the TFSA account will be $17,000: $5,500 x 2 = $11,000, plus $6,000. However, an individual will not accumulate TFSA contribution room for any year during which they are a non-resident of Canada.

TFSA Withdrawals

Any withdrawal is added back to your contribution room at the beginning of the following year. An individual can only replace the amount of the withdrawal in the same year only if s/he has available TFSA contribution room. For example, assume up through 2017, Jane contributed the maximum dollar amount each year to her TFSA. In 2018, she contributed $2,700 and had an unused contribution room of $5,500 - $2,700 = $2,800. If she withdrew $2,000 during the year but later decided to replace the amount within the same year, she could do so without being penalized since she still had $2,800 of contribution room.

Let’s look at another scenario. If Jane contributes $5,500 for the tax year 2019 (with the contribution limit being $6,000) and withdraws $2,000, she cannot replace the entire withdrawal amount within the same year because her available contribution room is only $500. In this case, Jane can replace $500 and wait until the beginning of 2020 to re-contribute the remaining $1,500, which will be added to her TFSA contribution room at the beginning of 2020.


In effect, the Tax-Free Savings Account contribution room is made up of:

  • the TFSA dollar limit plus inflation indexation
  • any unused TFSA contribution room from the previous year
  • any withdrawals made from the TFSA in the previous year

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