How does a TFSA work?

A tax-free savings account is a registered product with the Government of Canada that allows you to save or invest money without paying tax on the income it earns, and you also can withdraw it tax-free.

Any Canadian resident over the age of 18 can save up to $5,500 every year in a TFSA. The annual contribution limit was $5,000 from 2009 to 2012, $5,500 from 2013 to 2014, $10,000 for 2015 and $5,500 for 2016.

What happens if I decide not to contribute?

One of the major benefits of the TFSA is that unused contribution room is carried forward indefinitely. This means that if you did not open up a TFSA in 2009, you are still eligible to use your unused contribution limits from the years that your TFSA was not registered.

What happens to my contribution limits when I withdraw from my TFSA?

When you withdrawal funds from a TFSA, it will increase the unused contribution room in the year following the withdrawal.

How will I know what my TFSA contribution room is?

When you receive your Notice of Assessment (after filing your taxes) it will include your TFSA activity and allowable contribution room.

What happens if I over-contribute?

As the account holder, you are responsible for ensuring that you have not exceeded your TFSA contribution limit.

Over-contribution amounts are subject to a tax of 1% per month (12% annually) until withdrawn.

TFSA versus a non-registered account

Capital gains and other investment income earned in a TFSA are not taxed.

So, if you contributed $5,500 a year for 20 years to a TFSA, you would enjoy a total tax savings of $20,193 over a non-registered account.

Assumes a $5,500 annual contribution for 20 years, a 5% rate of return and an average tax rate of 35%. Source: CI Investments

Calculating Contribution Room

Here is an example of how to calculate TFSA contribution room;

In 2013,Bob opened a TFSA and contributed the maximum of $5,500. The following year, 2014, he withdraws $2,200 and made no further contributions during 2014 and 2015.

In 2016, he can contribute:

  • $20,000 ($5,000 of unused contribution room for each year from 2009 – 2012)
  • the $2,200 that was withdrawn in 2014
  • $5,500 of unused contribution room for 2014 and $10,000 for 2015
  • $5,500 for 2016
  • for a total of $43,200.

Any deposits made during 2016 will be deducted from $43,200. If he does not use up his full contribution room during the year, he can carry it forward to future years.