The Tax-Free Savings Account
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What is a TFSA?
A TFSA is an account that shields its contents from tax. You can have numerous financial instruments within the account and whatever gains are realized, they are tax-free. For example, if you own stocks inside your TFSA and their value increases, you will not be taxed on that income.
How to open a TFSA
Are you 18 or older? Are you Canadian? Ok, good. Opening a TFSA is very simple. Contact your financial institution and provide them with your SIN and date of birth. Your institution may also ask for supporting documents.
By now, you should see the great value of this a TFSA! The only problem is that there are limits as to how much money you can put in them.
The TFSA program began in 2009, and every year since, you have been allowed to contribute a certain amount, provided you were 18, and resident in Canada at some point during that year. Do not worry, if you have not contributed the max amount in previous years, as contribution room rolls over year by year (whether or not you have even opened a TFSA).
Withdrawals from your TFSA create additional contribution room, but only starting the next calendar year.
Say you turned 18 in 2015, and you contribute the maximal $10,000. You now have $0 left in contribution room for the year. You withdraw $1,000. You still have $0 in contribution room! However, this $1,000 will be added to your 2016 contribution room, at which point you are allowed to contribute $6,500 ($1,000 rollover + $5,500 limit for 2016)
So, if you were 18 or older in 2009, you would now have a cumulative $52,000 in contribution room.
Note that income generated by the investments within your TFSA do not affect your contribution room at all. It is quite likely that you will see an amount in your TFSA greater than your cumulative contribution room, and that is perfectly fine. Remember that all withdrawals get counted towards your next year's contribution room.
Taxes payable on TFSAs
Yes, the TFSA is tax-free, but there are a few special situations in which you may be liable for taxes (don't worry, these situations don't happen to most people). The cases can get pretty complex but if you think you fall in the following categories, please consult the official guide for further information.
- Tax payable on excess contributions
- Tax payable on contributions as a non-resident of Canada
- Tax payable on non-qualified investments
- Tax payable on prohibited investments
- Tax payable on an advantage
Frequently Asked Questions
By rule of thumb, if you are in the lowest tax rate you should contribute to the TFSA. It is more nuanced than that so here is a great place to get you started at taxtips.ca
This can be complicated, and you should refer to the Official CRA Guide
Please see the S5-F1-C1 guide to deteriming an individual's residence status.
This is permitted but the interest expenses related to the loan are not tax-deductible.
Please read the following links below for a more information. Remember that this guide does not cover each and every detail.