The Tax-Free Savings Account (TFSA) is an investment vehicle that allows investors to earn tax-free investment income. The TFSA was introduced for Canadian residents over 18 years of age as part of the Canadian Federal Government’s 2008 budget.


Annual contribution room in tax-free savings accounts began to accumulate in January 2009, and is currently capped at $5000 per year. Contributions are not tax deductible, however withdrawals are not subject to tax. Income, losses, and gains from the TFSA are also not included in taxable income.


The tax-free savings account is available to Canadian residents age 18 or older, and with a social insurance number. Individuals may have more than one TFSA, however contribution limits apply to the total of all accounts, not individually.

Non-residents can not open TFSAs. Account owners who leave Canada permanently, however, can retain their TFSA. Those who leave can not continue to contribute. It is important to note that interest income and capital gains from the tax-free savings account may be taxable in the individuals new country of residence.

If the account owner returns to Canada, contributions may resume. Any withdrawal made while the owner was a non-resident will be added to unused contribution room in the following year.

Annual Contributions

For 2010, the tax free savings account contribution limit is $5000. This contribution limit is not based on earned income, but is universal. The annual limit is tied to inflation, and will be rounded o the nearest $500.

Any unused contribution room is not lost, but rather carried forward until death. Withdrawals from the TFSA increase contribution room the following year.

If you do contribute more than the allowed limit, a 1%/month penalty on the contribution in excess applies.

Note that you are allowed to contribute at least $5000 per year to your TFSA. So, if you’ve never contributed a penny to your TFSA, you can contribute $10 000 as of Jan 1st 2010. If you contributed $5000 in 2009, you can contribute another $5000 as of Jan 1st 2010 if you qualified to contribute each year.


Withdrawals from the tax-free savings account can be made at any time, for any purpose. These withdrawals are not included in taxable income.

Withdrawals do not affect eligibility for federal income-tested benefits and credits, such as the Canada Child Tax Benefit, the Working Income Tax Benefit, GST credits, and Old Age Security.

Once again, withdrawals increase the contribution room in the following year.

Upon Death

Upon death, there is no income inclusion to the deceased investor. If a spouse or common law partner is named as the successor account holder, the plan is continued as a tax-free savings account and remains tax-free. If there is no named account successor, the proceeds of the plan are paid to the beneficiary or estate, and any growth after death is taxable.

A surviving spouse or common law partner who is not named as successor, but receives proceeds in this manner may contribute to this tax-free savings account, up to the value of the account at the time of death, without affecting their own contribution room, provided certain conditions are met.

Other Items of Interest

Interest on money borrowed to invest in a TFSA is not tax deductible
TFSA assets can be used as security for a loan TFSA transfers are allowed upon marriage/partnership break down Money can be given to a spouse/partner for contribution to their own TFSA without income attribution as long as the investment stays in the TFSA

If you would like more information about tax free savings accounts or other investment vehicles, be sure to contact us.