TFSA Contribution Limits and Room
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The annual TFSA contribution limit is the maximum amount you’re allowed to contribute to your TFSA in a given year. If you go over this ceiling, you’ll be subject to a 1% penalty fee from the Canada Revenue Agency. While there is no restriction to how many TFSAs you can open, your total contributions between all of them during the year must not exceed your allowable limit.
When the TFSA was introduced in 2009, the contribution limit was $5,000. This table shows the annual contribution limits from 2009 onwards (or, you can use our handy TFSA calculator to instantly determine your personal contribution limit):
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Each year, a certain amount of contribution room becomes available to you. You start to collect contribution room from the year you turn 18, even if you haven’t opened a TFSA and even if you haven’t earned any income. If you don’t contribute your full allowable limit during a given year, your unused TFSA contribution room is carried forward for you to use in future years. There’s also no lifetime contribution limit, so your unused TFSA contributions will carry forward indefinitely. After you withdraw money from your TFSA, you’re allowed to recontribute the full amount of the withdrawal as early as the beginning of the next calendar year.
In summary, your TFSA contribution room in any given year consists of three things:
- the annual contribution limit for that year
- your unused contribution room from the previous year
- any withdrawls you made in the prior year
How the Contribution Limit is Determined
The annual TFSA contribution limit started at $5,000 in 2009, but it's certainly seen changes since then. In 2013, it rose to $5,500 before nearly doubling to $10,000 in 2015 (the highest contribution limit on record thus far). After that, it returned to $5,500 until 2019, where it rose again to $6,000 and currently remains there. The new limit for each year is indexed to inflation, rounded to the nearest $500.
Wondering why the limit has seen such fluctuation? In 2015, the Conservative government enacted a change to how the limit was set. Instead of having the limit be indexed to inflation and rounded to the nearest $500, it would simply be set to $10,000 every year, regardless of the effect of inflation. When the Liberals were elected in late 2015, this change was reversed and so the limit for 2016 was brought back down to $5,500. The Bank of Canada’s (BoC) inflation target is at 2%, and so the annual contribution limit in 2019 increased to $6,000.
Over-contributing to your TFSA will result in being subject to a penalty of 1% of the over-contributed amount for every month that you’re over your limit. You’ll either have to withdraw the excess amount from your TFSA or wait until you get more contribution room in order to stop being charged this tax. The most common way that people over-contribute to their TFSAs is by recontributing money to their account before the start of the following year.
While this fee only applies to the amount you've over-contributed, it can still have a significant effect on your total savings. To illustrate, let’s say you over-contributed $1,000 to your TFSA in August of a given year. You’ll then be charged 1% of this amount ($10) every month from August until December. This will add up to $50 in penalties that you pay. With this in mind, make sure you're keeping track of what you contribute and withdraw from your TFSA so an over-contribution doesn't derail your savings goals.
Contributing to Family Members’ TFSAs
Although you’re not allowed to directly contribute to someone else’s TFSA (including family members), you can give them money to contribute to their own TFSA without having that amount or earnings from that amount attributed back to you. However, according to the Canada Revenue Agency (CRA), the total contributions both of you make can’t be more than your individual TFSA contribution room.
What You Can Hold in a TFSA
TFSAs are equipped to hold a wide range of investments, including:
- Mutual Funds
- Certain shares of small business corporations
You can also make an “in-kind” contribution by transferring stocks from a non-registered account directly into your TFSA. These stocks are assessed at their fair market value at the time of the transfer, and that will be the amount that’s contributed to your TFSA. If their value is greater than the price you paid for them when you bought them, you’re required to claim a capital gain on your taxes that year. If, however, the fair market value of these assets is less than their cost, then you can’t claim a capital loss.