What is a TFSA?

Whether you have a Tax-Free Savings Account (TFSA) are only just hearing about it, you probably have some questions about how it works.

 Follow our guide to learn everything you need to know about tax-free saving with TFSAs.

A Tax-Free Savings Account (TFSA) is a registered account where the income you earn is completely tax-free. You don’t even pay tax when you withdraw funds.

Just like when you invest in a Registered Retirement Savings Plan (RRSP), you can open a TFSA to invest in a variety of options — like savings accounts, GICs and mutual funds. You don't get a tax credit for investing, but once your funds are in the TFSA, any interest, dividends or capital gains can grow tax-free. In addition, you have the freedom to withdraw funds any time you want. 

Canadian residents over the age of majority with a valid Social Insurance Number (SIN) can open a TFSA. Non-residents of Canada who are 18 years or older with a valid SIN are also eligible to open a TFSA; however, they can't contribute to a TFSA, otherwise there would be hefty penalties. In other words, if you opened a TFSA as a Canadian resident, you’re allowed to maintain the account even if you become a non-resident, but you should not contribute as a non-resident.

Like an RRSP, the amount you can contribute varies yearly.

The government sets the maximum amount that you can contribute to a TFSA annually. 

Here’s a quick example of how this can work:

1. The Canadian government has set the maximum amount you can put into a TFSA in 2023 at $6,500. For 2024, the annual limit is set at $7,000.
   
   
2. You have $4,500 in available room in 2023 to save and contribute to your TFSA.
   
   
3. That leaves you with $2,000 remaining from your 2023 limit, which will then be added to future annual limits.
   

If the government raised the limit to $7,000 the year after, the surplus $2,000 from the previous year would be added. This would make your new limit or total contribution room on January 1, 2024 to be $9,000. The TFSA annual limit is indexed to inflation and is rounded to the nearest $500. We will explain how you can check your limit later on.

Note that you begin accumulating TFSA contribution room from the year you turn 18 (as long as you have been a resident of Canada without any gaps). This means that in 2024, your maximum contribution room could be $95,000, which is sum of annual contribution room for every year starting from 2009 (when the TFSA was introduced in Canada) until 2024.

However, if you are a newcomer to Canada, you begin accumulating TFSA contribution from the year you receive a valid SIN. For example, if you immigrated to Canada and received a valid SIN in 2023, then on January 1, 2024, your total contribution room would be $13,500, which is the sum of $6,500 (contribution room for 2023) and $7,000 (contribution room for 2024).

If you’re wondering how a TFSA compares to an RRSP, there are some key similarities and differences. Both are tax-advantaged savings plans.

With an RRSP, you defer paying taxes on the money you put in today and any investment income earned, until years later when you withdraw money during retirement. You are allowed to withdraw money from your RRSP at any time, but it will be subject to withholding tax and will also be taxed as income. Learn more about RRSPs.

With a TFSA, while you can use it to save towards retirement, you can also use it for many other goals because, unlike an RRSP, you’re free to withdraw money at any time without penalties. Since you’ve already been taxed on the money you put into your TFSA, any income you earn from the investments within your TFSA is completely tax free, even when you withdraw from it.

Find out more about the differences between the TFSA and RRSP.

There's not much difference between how you open a non-registered account, like a savings account, and a registered one, like an RRSP or TFSA. You can open one with your provider in person, through their online services or on the mobile app.

A great way to grow your investments is to save automatically through Pre-Authorized Contributions (PACs). This is when you preselect an amount to be automatically deducted from your savings or chequing account to deposit into your investment account.

You can make many different kinds of investments within TFSAs, which helps diversify your portfolio.

Options include:

The amount you can put into your TFSA depends on your contribution room. The TFSA contribution room is the total of all of the following:

• the TFSA dollar limit of the current year, which in 2024 is $7,000
• any unused TFSA contribution room from previous years
• any withdrawals made from the TFSA in the previous year

For example, if you have contribution room of $6,000, and deposit $6,000 to a cash account in March, but take it out in November, you can’t redeposit within the same calendar year. You must wait until next year for the $6,000 to be added back to your available contribution room.

The minimum age requirement to open a TFSA is 18, although it can be 19 in some provinces.

If you overcontribute to your TFSA, the Canada Revenue Agency (CRA) will charge a tax of 1% per month on the over-contribution amount. This will continue until the entire over-contribution amount is withdrawn, or the entire over-contribution amount is used by additions to your unused contribution room in the future.

You'll receive your contribution limit with your tax return, or you can contact the Canada Revenue Agency.

Need help determining your TFSA contribution room? Visit one of the following pages on the Government of Canada website:

• My Account for Individuals
• MyCRA at Mobile apps – Canada Revenue Agency
• Represent a Client if you have an authorized representative
• Tax Information Phone Service (TIPS) at 1-800-267-6999

If you’re starting out saving, the Tax-Free Savings Account can be a great way to begin your investment journey. It’s helpful for those who don’t have a high taxable income, or high-income earners who have reached their RRSP limit.

It’s also useful in the event you need to make a withdrawal because you wouldn’t be penalized.

You can talk to your Scotia advisor about how the TFSA could work as part of your financial plan.

There are many benefits of a TFSA:

• You can take advantage of compound growth over the years with incremental investments.
• Interest, dividends and capital gains earned in a TFSA are tax-free.
• If you withdraw money from your TFSA, you can return that money to your account as long as you have available contribution room.
• You can give money to your spouse for them to contribute to their TFSA without any tax consequences.
• Your TFSA contribution room isn’t income dependent. Contribution room is the same regardless of your income.
• There are no mandatory withdrawals.

An RRSP and a TFSA can be used together if you’re using them to save for your retirement. Many people think of the TFSA as a short-term savings option, but it’s also great for flexible long-term savings to help support you in retirement.

 If you would like a spouse or common-law partner to be the successor, you will need to assign them in advance to ensure a smooth transfer of your TSFA to theirs. The successor holder can make tax-free withdrawals from that account and put it into their own TFSA, depending on their own unused TFSA contribution room. 

If you designate your spouse or partner as a beneficiary of your TFSA instead of as a successor holder, they have until December 31 of the year following the year of death to contribute any payments received out of your TFSA (up to the date of death value) into their own TFSA without affecting their own unused TFSA contribution room. To complete this “exempt contribution,” they must file CRA Form RC240 within 30 days after the contribution is made. 

Your children, siblings, parents or friends may also be named as beneficiaries. They can contribute proceeds from your TFSA to their own if they have enough contribution room. Your beneficiary should not have to pay tax on payments made out of the TFSA as long as the total payments do not exceed the fair market value of your TFSA at the date of death.

Talk to legal and tax experts about your situation to help guide you through this process.

When TFSAs were introduced in 2009, they brought Canadians a whole new way of saving their money while allowing it to grow tax-free. TFSAs are a flexible option, letting you save for any length of time and invest according to your risk tolerance.

Talk to your Scotia advisor about whether TFSAs are right for your investment plan.