Tax Free Savings Accounts – the basics


What’s a TFSA?

A Tax Free Savings Account (“TFSA”), is a government approved savings or investment account designed to encourage you to save for your needs over your lifetime.

Any individual (other than a trust) who is resident in Canada and 18 years of age or older will be eligible to establish a TFSA.  The individual will be required to provide the issuer of the account with his or her Social Insurance Number when the account is established. An individual will be permitted to hold more than one TFSA.


Contribution Limit

An individual will be able to make total TFSA contributions up to the contribution limit he or she has available.

Starting in 2009, individuals 18 years of age and older acquired $5,000 of TFSA contribution room each year. The $5,000 limit is indexed to inflation and the annual additions to contribution room are rounded to the nearest $500. In 2015 the limit was increased to $10,000 but from 2016 the limit moved back to $5,500. See CRA’s website on TFSA contribution limits here.

Unused contribution room will be carried forward to future years. For example, if an individual contributes $2,000 to a TFSA in 2009, the individual’s contribution room for 2010 will be $8,000 (= $5,000 for 2010 plus $3,000 carried forward from 2009). There will be no limit on the number of years that unused contribution room can be carried forward.

Any amounts withdrawn from an individual’s TFSA in a year will be added to the individual’s contribution room for the following year. This will give individuals who access their TFSA savings the ability to re-contribute an equivalent amount in the future.

Excess contributions are subject to a tax of 1% per month.


TFSA Income and Income Tested Benefits

While contributions to a TFSA are not deductible in computing income for tax purposes, income, losses and gains in respect of investments held within a TFSA, as well as amounts withdrawn, will not be included in computing income for tax purposes or taken into account in determining eligibility for income-tested benefits or credits delivered through the income tax system (for example, the Canada Child Tax Benefit, the Goods and Services Tax Credit and the Age Credit).

Nor will such amounts be taken into account in determining other benefits that are based on the individual’s income level, such as Old Age Security benefits, the Guaranteed Income Supplement, Pharmacare thresholds, or Employment Insurance benefits.


Qualified Investments

A TFSA is generally be permitted to hold the same investments as a Registered Retirement Savings Plan (RRSP). The RRSP qualified investment rules accommodate a broad range of investments including, for example, mutual funds, publicly-traded securities, government and corporate bonds, guaranteed investment certificates and, in certain cases, shares of small business corporations.

A TFSA is however prohibited from holding investments in any entities with which the account holder does not deal at arm’s length—including for this purpose an entity of which the account holder is a “specified shareholder” as defined in the Income Tax Act or in which the account holder has an analogous interest (generally a 10 per cent or greater interest, together with non-arm’s length persons).


Interest Deductibility and Collateralization

Because the investment income within, and withdrawals from, a TFSA will not be taxable, interest on money borrowed to invest in a TFSA will not be deductible in computing income for tax purposes.

There is no prohibition in the Income Tax Act on an individual’s ability to use their TFSA assets as collateral for a loan.


Income Attribution Rules

If an individual transfers property to the individual’s spouse or common-law partner, the income tax rules generally treat any income earned on that property as income of the individual. An exception to these “attribution rules” will allow individuals to take advantage of the TFSA contribution room available to them using funds provided by their spouse or common-law partner: the attribution rules will not apply to income earned in a TFSA that is derived from such contributions.


Treatment on Death

Generally, an individual’s TFSA will lose its tax-exempt status upon the death of the individual. (That is, investment income and gains that accrue in the account after the individual’s death will be taxable, while those that accrued before death will remain exempt).

However, an individual will be permitted to name his or her spouse or common-law partner as the successor account holder, in which case the account will maintain its tax-exempt status.

Alternatively, the assets of a deceased individual’s TFSA may be transferred to a TFSA of the surviving spouse or common-law partner, regardless of whether the survivor has available contribution room, and without reducing the survivor’s existing room.


Transfers on marriage breakdown

On the breakdown of a marriage or a common-law partnership, an amount may be transferred directly from the TFSA of one party of the relationship to the TFSA of the other. In this circumstance, the transfer will not re-instate contribution room of the transferor, and will not be counted against the contribution room of the transferee.  (A court order would normally be required to be able to effect such transfers).



An individual who becomes non-resident will be allowed to maintain his or her TFSA and continue to benefit from the exemption from tax on investment income and withdrawals. However, no contributions will be permitted while the individual is non-resident, and no contribution room will accrue for any year throughout which the individual is non-resident.



Financial institutions eligible to issue RRSPs will be permitted to issue TFSAs.  This includes Canadian brokers, trust companies, life insurance companies, banks and credit unions.



The Canada Revenue Agency (CRA) will determine TFSA contribution room for each eligible individual who files an income tax return.

Individuals who have not filed returns for prior years (because, for example, there was no tax payable) will be permitted to establish their entitlement to contribution room by filing a return for those years or by other means acceptable to the CRA.

To provide the CRA with adequate means to determine contribution room and monitor compliance, TFSA issuers are required to file annual information returns.

The information required to be reported is expected to include, for example, the value of an account’s assets at the beginning and end of the year and the amount of contributions, withdrawals and transfers made in the year.


What if you can’t make both maximum RRSP contributions and TFSA contributions?

Ideally, you should make maximum contributions to both your RRSP and TFSA. But the reality for many is that there’s only so much money left over from living in the present to put away for the future. The best decision as to which account to contribute to depends on your tax rate at the time of contribution and the tax rate at the time of withdrawal.

If you are in a high tax bracket and expect not to withdraw monies until retirement where you expect to be in a lower tax bracket, then it is best to make the RRSP contribution. If you are in a low tax bracket now and expect at time of withdrawal to be in a higher tax bracket, then it is best to make the TFSA contribution. If you anticipate your tax bracket now should be about the same as at the time you withdraw in the future, then you can contribute to either plan (mathematically they provide the same after-tax result).


The Next Step

If you would like more information about TFSAs or would like to open one up, please call me at 604-288-2083 (x2) or email me at


Written by Steve Nyvik, BBA, MBA ,CIM, CFP, R.F.P.
Financial Planner and Portfolio Manager, Lycos Asset Management Inc.

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