TFSA Rules
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Natasha Macmillan, Business Unit Director - Everyday Banking
What is a TFSA?
The tax-free savings account (TFSA) allows your investments to generate returns without being taxed, allowing them to grow at a faster rate.
Rules around the operation of TFSAs are outlined in the Federal Income Tax Act, and the Canada Revenue Agency (CRA) is the authority that administers and oversees the enforcement of these regulations.
TFSA Investment Options
While its name might lead you to think of the TFSA as a simple savings account, it has the ability to hold a wide variety of different investments, all sheltered from taxes. These include:
- Cash
- Mutual Funds
- Stocks
- Bonds
- Guaranteed Investment Certificates (GICs)
- Certain shares of small business corporations
TFSA Eligibility
To open a TFSA, residents and non-residents of Canada will need:
- To be the age of majority in their province or territory
- A valid social insurance number (SIN)
In some province or territories, the age at which someone can enter into a contract (which includes opening a TFSA) is 19. In these cases, contribution room from when they turned 18 is carried over into the following year. And because TFSAs can remain open for a lifetime, you'll continue to accumulate contribution room every year as long as you're a Canadian resident.
This calculator is designed for illustrative purposes only.
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TFSAs for Non-residents
Non-residents of Canada—those who have a valid SIN—are allowed to open a TFSA. However, they’ll have to pay a 1% tax each month on the amount in the account.
If you were a resident of Canada and since became a non-resident, you can keep your TFSA and won’t be taxed in Canada on any earnings or withdrawals from your account. However, you’ll no longer accumulate TFSA contribution room until you become a resident again. Also, any withdrawals made when you were a non-resident will be added to your contribution room in the following year. However, it’ll only be available when you re-establish your Canadian residency.
TFSA Beneficiary
When you go to a financial institution to open a TFSA, you’ll be asked to name a beneficiary. This is the person who will inherit the investments in your TFSA after your death. Your beneficiary will receive the assets in your TFSA tax-free. In other words, it won’t be counted as income. However, they will have to pay tax on any earnings generated within the TFSA after your death.
If you’re married or are in a common-law partnership, you instead have the option of naming a TFSA successor holder. This makes it so that your spouse or common-law partner becomes the new owner of the TFSA after your death, and the tax-free status of the account remains intact.
TFSA Contributions
Canadians can contribute up to a certain amount to their TFSAs every year. This amount is called the annual contribution limit. When the TFSA was introduced in 2009, the annual contribution limit was set to $5,000. Now in 2023, the limit is at $6,500. There’s no limit to how many TFSAs you can have, as long as all of your contributions to all of your TFSAs in a given year don’t exceed your allowable limit.
You start to accumulate contribution room from the year you turn 18, and if, during any given year, you don’t contribute the full amount that you’re allowed, your unused contribution room is carried forward to future years. If you live in a province/territory where the age of majority is 19, you won’t be able to open a TFSA until you’ve reached that age, but by then you’ll be able to contribute the combined amount for the years that you were 18 and 19 years old.
TFSA Over-contributions
If you contribute more than your allowable TFSA contribution room, you’ll be subject to a 1% penalty each month on the amount of your excess contribution. For example, if you make an over-contribution of $2,000, you’ll have to pay a tax of $20 each month. The 1% tax will continue to apply until the entire excess amount is withdrawn or until the excess amount is absorbed by additions to their unused contribution room in following years.
TFSA Withdrawals
Any withdrawals made from your TFSA are tax-free and you can make withdrawals at any time. You can also recontribute any withdrawals back into your TFSA starting Jan. 1 of the next calendar year.
TFSA Transfers
If you want to transfer money from a TFSA from one financial institution to another, you’ll need to make a direct transfer so there aren’t any potential tax consequences. If you withdraw funds from a TFSA and immediately deposit them in another TFSA, you may make an over-contribution if you don’t have enough room. That’s why you should get your financial institution to make a direct transfer on your behalf.
If you’re married or in a common-law relationship that breaks down, you can transfer an amount directly from one TFSA to another without affecting either individual’s contribution room. This transfer must be made by a financial institution.
In order for this to be done, you and your current/former spouse or common-law partner must be separated and not living together at the time of the transfer. Also, you must be entitled to receive or be required to pay the amount under a written separation agreement or under a decree, order, or judgment of a court following the breakdown of your relationship.
If both of these conditions are met, the transfer won’t reduce the recipient’s TFSA contribution room nor will the amount be added back to contribution room in the following year of the person who made the transfer.