A Tax-Free Savings Account (TFSA) is a registered tax-advantaged savings account that can help you earn money, tax-free.
You can think of a TFSA like a basket, where you can hold qualified investments, that may generate interest, capital gains, and dividends, tax-free.
Whether you’re saving for your dream wedding, a rainy day, your first home, or an extended vacation, a TFSA can help you reach your goals sooner. To get you started, we break down: what is a TFSA, how it works, and how it can benefit your savings plan.
When did Tax-Free-Savings Accounts become available?
The TFSA was introduced in 2009 by the Government of Canada as an incentive for eligible Canadians to save.
How does a TFSA work?
You can hold qualified investments like cash, stocks, bonds, mutual funds in a TFSA and can withdraw contributions as well as the interest, capital gains, and dividends earned in the account at any time1, without paying taxes (or reporting the withdrawals as income when you file your taxes).
Each year, the Government of Canada determines the maximum amount a holder of a TFSA can contribute to it in that year. This limit is known as the contribution limit. The contribution room begins to accumulate every year, if any time beginning in the calendar year a Canadian resident is 18 years and older. If you don’t contribute up to the contribution limit for a given year, this amount is carried forward and is added on to your contribution room for future years.
Who is eligible for a TFSA?
TFSAs are available to every Canadian resident, who is 18 years of age or older with a valid Social Insurance Number (SIN). To open a TFSA with TD, you must be of the age of majority in your province of residence.
Eligibility for non-residents of Canada
If you become a non-resident of Canada for tax purposes after opening a TFSA, you can keep your TFSA and will not be taxed in Canada on any earnings in the account or on withdrawals from it.
However, if you make a contribution while you are a non-resident, except certain exceptions, you will be subject to a 1% tax for each month the contribution remains in the account. You may also be liable for other taxes. Further, TFSA contribution room will not accumulate for any year during which you are a non-resident of Canada throughout the entire year.
What are the benefits of opening a TFSA?
There are many benefits of using a TFSA to save:
- Added flexibility. A TFSA is a savings solution that offers you the flexibility to save for a multitude of short-term and long-term goals. It can help you reach your saving goals, and you can withdraw your money when you need it 2 .
- Tax-free growth. You pay no tax on any investment income you may earn in your TFSA and you can hold a variety of qualified investments, including cash, stocks, guaranteed investment certificates and mutual funds. The higher the return potential on your investments, the faster your savings may grow, tax-free.
- Retirement planning. A TFSA can complement your personal RRSP by providing additional tax-advantaged savings when you have no more RRSP contribution room or you are over age 71 and not allowed to hold an RRSP anymore. By contributing to a TFSA, any income earned in the account is tax-free, even when withdrawn.
- Making Withdrawals. You can withdraw funds from the TFSA without paying tax. This can make the TFSA a great tool to save for big-ticket items. When you’re ready to use your funds, you can withdraw without paying tax. This gives you more money for the things you care about.