Tax-free savings accounts (TFSAs) have been a part of the Canadian tax system since 2009, and the TFSA program can be utilized by more Canadians than any other tax-advantaged savings program. And Canadians have clearly recognized the benefits: Canada Revenue Agency statistics show that, as of 2022, nearly 18 million Canadians had opened a TFSA.

There are a number of benefits to saving through a TFSA and some of those benefits cannot be obtained through any other tax-advantaged savings plan. The main benefit provided by the TFSA program is the ability to invest savings, and to earn investment income on those savings, on a tax-free basis, both as such investment income is earned and when it is withdrawn. (Funds contributed to a registered retirement savings plan (RRSP) or held in a registered retirement income fund (RRIF) can similarly grow free of tax, but all such investment gains are taxed when withdrawn from such plans). The TFSA is unique in another way, in that a planholder who withdraws funds from their TFSA account has the ability to re-contribute those funds to that plan in any future year. It’s also the case that (unlike an RRSP) TFSA planholders are not required to have any amount of income in order to make a contribution to their TFSA. The annual contribution limit for a TFSA planholder is set by law and is the same for everyone, regardless of age or income. Finally, each Canadian begins accumulating TFSA contribution room as soon as they turn 18, whether they have opened a TFSA or not.

Details of the rules governing the TFSA program are outlined below. Those rules are fairly straightforward, but there are some aspects of the TFSA rules (particularly around re-contribution of withdrawals) which can trip up the unwary taxpayer, and thereby undermine the tax benefits which a TFSA can provide.

A TFSA can be opened by any Canadian who is age 18 or older (with some variation among provinces, depending on the age of majority in the particular province) and has a social insurance number. There is no upper age limit, meaning that a TFSA can be opened by an eligible Canadian at any point in their life.

The amount that can be contributed to a TFSA annually is set by law, and is partially indexed to the rate of inflation. Annual contribution limits which have applied since 2009 are as follows.

 Annual TFSA dollar limit

2009 to 2012          $5,000

2013 and 2014       $5,500

2015                       $10,000

2016 to 2018          $5,500

2019 to 2022          $6,000

2023                       $6,500

2024 and 2025       $7,000

Contribution room starts accumulating for every Canadian as soon as they turn 18, and continues to grow each year. As well, contribution room carries forward indefinitely, so where a taxpayer does not make any contribution to a TFSA during a particular year (or does not even have a TFSA), the available contribution room can be carried forward and that contribution can be made in any future year, without limit.

For example, someone who is now 30 and has never contributed to or even opened a TFSA started accumulating TFSA contribution room in 2013 (when they turned 18) and would now be able to open a TFSA and contribute $81,000 to that plan. That total is comprised of accumulated contribution room as follows: $5,000 for each of 2013 and 2014, $10,000 for 2015, $5,500 for each of 2016, 2017, and 2018, $6,000 for each of 2019, 2020, 2021, and 2022, $6,500 for 2023, and $7,000 for each of 2024 and 2025.

Contributions that are made to a TFSA are not deductible for tax purposes (in other words, contributions are made from income on which tax has already been paid). However, investment income earned by amounts held within a TFSA are not taxed as they are earned, and both accrued investment income and original contribution amounts are not taxed when withdrawn from the plan.

Finally, the TFSA is the only tax-sheltered plan available to Canadians in which amounts withdrawn from the plan can be re-contributed in a future year. For example, a TFSA planholder who withdraws $7,000 from their TFSA in 2025 can re-contribute that amount in 2026 or any subsequent year. It’s important to note that any such re-contribution cannot be made until the year following the year that funds were withdrawn from the plan.

It’s apparent that the ability to invest funds and earn investment income which will never be subject to income tax is of benefit to any taxpayer. There are, however, some individual circumstances in which contributing to a TFSA can be of particular value, including the following.

• Every Canadian taxpayer who has saved for retirement by making contributions to a registered retirement savings plan (RRSP) must collapse that RRSP by the end of the year in which the taxpayer turns 71. In most cases, such taxpayers open a registered retirement income fund (RRIF) into which accumulated RRSP funds are transferred. However, where funds are held in an RRIF, a percentage of such funds must be withdrawn each year and included in income, without exception. Taxpayers who are required to make such RRIF withdrawals and do not have an immediate need for those funds can contribute them to a TFSA. There are two benefits to doing so: first, the funds can be invested and grow on a tax-free basis and no tax will be payable when either the original contributions or the investment gains are withdrawn. Second, such TFSA withdrawals are not counted as income for purposes of determining whether and to what extent the taxpayer is eligible for a number of tax credit and benefit programs available to seniors. In particular, TFSA withdrawals are not included in income for purposes of determining whether the taxpayer’s eligibility for Old Age Security benefits is eroded.

• Taxpayers who are expecting their income to rise significantly within a few years – for example, students in post-secondary or professional education or training programs – can save some tax by contributing to a TFSA while they are in school and their income (and therefore their tax rate) is low, allowing the funds to compound on a tax-free basis, and then withdrawing the funds tax-free once they’re working, when their tax rate will be higher. At that time, the withdrawn funds can be used to make contributions to an RRSP, which will be deducted against income which would be taxed at the much higher rate, generating a tax savings. And, if a need for funds should arise in the meantime, a tax-free TFSA withdrawal can always be made.

• Lower income taxpayers, for whom there isn’t likely to be a great difference between pre- and post-retirement income, are likely better off saving for retirement through a TFSA than contributing to an RRSP or accumulating savings outside any tax-assisted savings plan. That’s especially the case where those taxpayers may be eligible in retirement for means-tested government benefits like the Guaranteed Income Supplement or tax credits like the GST/HST credit or age credit. Withdrawals made from an RRSP or an RRIF during retirement will be included in income for purposes of determining eligibility for such benefits or credits, and lower-income taxpayers could find that such withdrawals have pushed their income to a level which reduces or eliminates their eligibility. On the other hand, monies withdrawn from a TFSA are not included in income for the purpose of determining eligibility for any government benefits or tax credits, so saving through a TFSA will ensure that receipt of such benefits is not put at risk.

The Canada Revenue Agency publishes a guide to the TFSA program, which reviews and summarizes the rules governing the program in detail. That guide, which was updated and re-issued earlier this year, can be found on the CRA website at https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/rc4466/tax-free-savings-account-tfsa-guide-individuals.html.