Ever since I immigrated from India to Canada as a Permanent Resident (PR), I have been researching retirement plans, investment options, and tax-saving investment opportunities. Thanks to the internet and the financial advisors I met in major Canadian banks, I was able to get introduced to the Tax-Free Savings Account (TFSA) in Canada.

This guide comprehensively covers the TFSA plan in Canada, its features, eligibility, contribution limits, its pros and cons, withdrawal rules, rates, and the best places to open a TFSA

Table of Contents

TFSA: What is TFSA?

A TFSA is a registered retirement and savings account for residents in Canada, in which your contributions grow tax-free and even your withdrawal is tax-free.

This means that the contributions you make within a Tax-Free Savings Account (TFSA), along with the accrued interest on your contributions, remain exempt from taxation. Even upon withdrawal of funds from a TFSA, no capital gains tax is imposed.

However, money deposited in a TFSA is after-tax contributions, which means taxes are implied on the money you contribute in a TFSA. Hence, akin to its counterparts like an RRSP and FHSA, a TFSA does not provide tax rebates by reducing your taxable income.

The TFSA allows you to invest your funds in stocks, ETFs, and more, without incurring any taxes on the interests and gains.

TFSA Features in Summary

*Tax-free withdrawals*	The withdrawals or the gains are tax-free. This means any capital gains or dividends (in the case of stocks) are tax-free.
*Tax-deferred growth*	The contributions you make within a Tax-Free Savings Account (TFSA), along with the accrued interest on your contributions, remain exempt from taxation.
*After-tax contributions*	The money deposited in a TFSA is after-tax contributions, which means taxes are implied on the money you contribute in a TFSA. Here’s a simple way to think about it: the money you put into a TFSA account doesn’t lead to any tax deductions from your annual income. For instance, if you have an annual income of $100,000 that is subject to taxation, and in the same year, you contributed $5,000 into your TFSA, this contribution won’t be subtracted from your taxable income, as it would be in an FHSA or an RRSP.
*No penalty withdrawals*	You can withdraw your savings at any time, without any capital gains tax (tax in your withdrawal) and penalties. The tax-free component is crucial: you’ll pay zero taxes on investment income. It doesn’t matter if your investments grow from $5,000 to $500,000. As long as your investments are sheltered in a TFSA, the CRA won’t tax you on the money you withdraw.
*Contribution Limits*	There is an annual limit on the contributions you can make in a TFSA. For 2023, the maximum annual contribution you can make in a TFSA is $6500 (as against $6000 for 2022). But any unused contributions in a year can be rolled over to the next year. Furthermore, any withdrawals you make in the TFSA in the previous year is also added to your TFSA contribution limit.
Eligibility	A Canadian resident or citizen with age 18 years or more can open a TFSA.
*Good for*	Unlike an RRSP, a TFSA is preferable when you aim for relatively short term investments, for example for buying a car, down payment for your house, etc.

TFSA features

TFSA Eligibility

To open a TFSA, one must be

A Canadian resident
Has a valid SIN number
Is of age 18 years or older

TFSA Limit 2023 or TFSA Contribution Limit 2023

First, you do not need an earned income to contribute to a TFSA.

In a TFSA, your contribution limit in a year is calculated based on the below 3 factors.
Annual contribution limit defined by the CRA.
Unused contribution rooms from the previous years, which are carried forward to the future years.
Contribution room generated due to any withdrawals made in the last year. For example, if you withdrew $500 last year, that $500 is added to your contribution room for this year.
TFSA Contribution Limit or Room

Hence there is a difference between the annual TFSA contribution limit allowed by the CRA and your personal TFSA contribution in that year.

Your personal TFSA contribution limit in a year may be more than the allowed annual TFSA contribution limit. As mentioned, this is because of unused TFSA contribution limits that are accumulated from the previous years and also because of any withdrawals in the last year.

If you put in more than this limit, you’ll be charged a tax on the extra amount you’ve contributed to your TFSA. At any time in the year, if you contribute more than the TFSA contribution limit for the year, you will have to pay a tax equal to 1% of the highest excess TFSA amount in the month, for each month that the excess amount stays in your account.

For instance, the Tax-Free Savings Account (TFSA) contribution limit for the year 2023 is set at $6,500. Suppose you maintain a balance of $7,500 in your TFSA account during the month of September, which exceeds the 2023 contribution limit by $1,000.

Consequently, a tax is assessed at a rate of 1% on the excess amount, totaling $10. Should the surplus of $1,000 persist into October, an additional $10 in tax will be incurred, and this pattern continues accordingly.

As discussed earlier, the unused contribution limit in a preceding year is carried forward to the future years.

If you were 18 years or older in 2009, then your TFSA contribution limit starts accumulating each year, even if you did not start contributing to the TFSA.

The year in which you turned 18, the TFSA contribution limit will start accumulating from that year.

For example, let’s say you turned 18 in 2017 but plan to open your TFSA in 2023. Your TFSA contribution limit for 2023 is the accumulated limit from 2017 onward, as follows:
2017: $5,500
2018: $5,500
2019: $6,000
2020: $6,000
2021: $6,000
2022: $6,000
2023: $6,500
Therefore, your total accrued contribution limit for 2023, when you plan to open your TFSA, is $41,500

Overall,

TFSA Contribution limit in a year= Annual Contribution Limit for the year +Unused contribution rooms from the previous years (starting the year you turned 18 years of age) + Amount withdrawn in the last year from your TFSA

TFSA Calculator

The TFSA Calculator given below can calculate your TFSA contribution limit based on the year you were born, the amount of contributions you have already made to TFSA and any withdrawals you made the previous year.

Please note, this calculator is valid for Canadian citizens only.

TFSA Calculator

Year of Birth TFSA Contributions Made Till Date (CAD) Withdrawals in Previous Year (CAD)

Total TFSA Limit for 2023:

TFSA Contribution Limit 2023

The TFSA contribution limit for 2023 is $6,500. Reiterating, that unused contribution room from previous years can be carried forward, allowing for cumulative contributions over time.

TFSA Contribution Limit 2022

In the preceding year, the TFSA contribution limit was $6,000 as well.

*Year*	Contribution Limit
2009 to 2012	$5000
2013 and 2014	$5,500
2015	$10,000
2016 to 2018	$5,500
2019 to 2022	$6,000
2023	$6,500

TFSA Contribution Limits

Lifetime TFSA Contribution Limit

There is no maximum lifetime contribution limit in a TFSA, unlike an FHSA which has a lifetime contribution limit of $40,000. In a TFSA, there is an annual contribution limit, and any unused contribution limits from previous years are also added to the current year's limit.
Regardless of when you started your TFSA, if you were 18 years old in 2009, your allowable TFSA contributions began in 2009 when the TFSA was introduced. Therefore, in 2023, if you were 18 years old in 2009, your contribution limit would be $88,000 (provided you have never contributed in the TFSA since then).
TFSA Contribution Limits

Let's take another example.

For example, let's say you turned 18 in 2008 (before 2009) but plan to open your TFSA in 2023. Your TFSA contribution limit for 2023 is the accumulated limit from 2009 onward, as follows:

2009: $5000
2010:$5000
2011:$5000
2012:$5000
2013: $5500
2014: $5500
2015: $10,000
2016: $5,500
2017: $5,500
2018: $5,500
2019: $6,000
2020: $6,000
2021: $6,000
2022: $6,000
2023: $6,500

Therefore, your total accrued contribution limit for 2023, is $88,000.

TFSA Withdrawal Rules

Withdrawal at any time and for any purpose: One of the key advantages of a TFSA is the flexibility it offers for withdrawals. Funds can be taken out at any time, for any purpose, without any tax implications or any penalty.

No limit on withdrawals: There is no limit on the amount you can withdraw from your TFSA at any one time.

No tax implications or penalties on withdrawals: Withdrawals do not count as income, which means they have no impact on benefits like the GST Credit, Employment Insurance and Old Age Security.

Withdrawals from the previous year are added to the contribution room for the following year: Any amount withdrawn in the past year is added back to the contribution room the following year.

TFSA vs RRSP vs FHSA

Both TFSA and RRSP are excellent and secure savings and investment accounts, but they serve different purposes. Both accounts enable you to invest and grow your funds in a tax-deferred manner.

If you have a short-term goal like buying a car, or going on a holiday, then TFSA is your preferred plan. This is because withdrawals are tax-free.

On the other hand, RRSP is specifically designed for retirement savings. It is meant to help you save for your retirement.

	*Withdrawals*	*Contributions*	*Tax benefits*	*Growth*
*TFSA*	Tax-free	After-tax	No	Tax-free
*RRSP*	Taxable	Pre Tax	Yes	Tax-free
*FHSA*	Tax-free if done for buying your first house in Canada	Pre Tax	Yes	Tax-free

TFSA vs RRSP vs FHSA

TFSA Investment Options

The TFSA can be used as another savings account or as an investment account. You can invest in eligible or permitted TFSA investment options. Non-qualified investments, which are not allowed in a TFSA, would be taxed heavily. The list below shows some common types of eligible investments that are allowed in a TFSA:

Cash
Stocks
Bonds
Mutual Funds
Guaranteed Income Certificates (GICs)
Exchange-Traded Funds (ETFs)
Qualified Small Business Corporation (SBC) Shares

Pros and Cons of TFSA

Pros:

Tax-free growth: Investments within a TFSA grow tax-free, allowing your money to compound over time.
Tax-free withdrawal: Withdrawals do not count as income, which means they have no impact on benefits like the GST Credit, Employment Insurance and Old Age Security.
Flexibility: You can withdraw funds at any time without restrictions.
Wide range of investment options: TFSA can hold various types of investments, providing flexibility in your portfolio.

6. Cons:

Over-contributions: Be mindful of contribution limits to avoid penalties.
Not a tax deduction: Unlike an RRSP (Registered Retirement Savings Plan), contributions to a TFSA are not tax-deductible.

Conclusion

As we have seen by now, the Tax-Free Savings Account (TFSA), which was introduced in 2009 by the CRA, is a savings and investment account, where you can invest in multiple products like stocks, bonds, mutual funds, GICs and more.

The TFSA should be used for short-term financial goals like buying a car, or going on a holiday. However, it does not give you tax benefits in your income as an RRSP does. But if you need for example $10,000 the next year for buying a car, then you can use TFSA as it will allow tax free growth of your funds and also tax free withdrawal after one year.