Your TFSA: how it works

A tax-free savings account (TFSA) lets you save or invest, and the interest, dividends and capital gains it earns are generally tax-free, even when you take them out. Unlike an RRSP, you don’t get a deduction for putting money in.

Who can open one

You can open a TFSA if you’re a resident of Canada for tax purposes, 18 or older and have a valid social insurance number. You don’t need earned income. In provinces and territories where you must be 19 to sign a contract, you can open one at 19 and still use the room from the year you turned 18.

Banks, credit unions, insurance companies and trust companies offer TFSAs. One can be a simple deposit account or GIC, an annuity contract, or a trust account holding investments such as mutual funds or shares, including a self-directed account where you choose the investments.

How contribution room builds up

Every year the government sets a TFSA dollar limit, the same for everyone, and adds it to your room on January 1. The limit is $7,000 for 2025 and $7,000 for 2026; the registered plan limits table shows both.

• Room starts at 18. If you’re a resident of Canada, you start building room in the year you turn 18, whether or not you open an account.
• Unused room carries forward. You can contribute more than one year’s limit only if you have room left from earlier years.
• New residents start building room in the year they become residents. They don’t get room for years they lived elsewhere.
• One limit for all your TFSAs. If you have several accounts, the room is shared among them.

Your room for the year works out as:

1. this year’s dollar limit,
2. plus unused room from previous years,
3. plus anything you withdrew last year,
4. minus what you’ve already contributed this year.

Changes in the value of your investments don’t affect your room, and neither do account fees. A gain doesn’t use up room, and a loss doesn’t give you more.

Taking money out

You can withdraw at any time, for any reason, without tax. The amount you take out is added back to your room on January 1 of the next year, not right away. This catches people out: if you withdraw and put the money back in the same year without unused room to cover it, the re-contribution is an excess.

Income earned in a TFSA, and money you withdraw, don’t affect federal income-tested benefits and credits such as Old Age Security, the Guaranteed Income Supplement, Employment Insurance, the Canada child benefit, the Canada workers benefit and the GST credit.

The tax on over-contributing

Any amount above your available room is taxed at 1% a month for as long as it stays in the account. If you over-contribute, withdraw the excess as soon as you can rather than waiting to hear from the CRA, and file a TFSA Return to report it.

Don’t rely only on the room figure in your CRA account. It’s updated once a year, in the spring, after your TFSA issuers report the previous year’s transactions (they have until the end of February). Keep your own record of contributions and withdrawals across all your accounts.

What you can hold

TFSA investments are generally the same kinds allowed in an RRSP: cash, GICs, bonds, mutual funds, securities listed on a designated stock exchange, and certain shares of small business corporations. Non-qualified or prohibited investments are taxed. If you trade so often and so expertly that it looks like a business, the CRA may deregister the account and tax the income as business income.

A few moves to be careful with:

• Moving investments in kind. Shares or funds you transfer in from a regular account are treated as sold at fair market value. A gain is taxable; a loss can’t be claimed. The contribution counts at that value.
• Moving RRSP investments. A transfer from your RRSP is a taxable RRSP withdrawal, not a tax-free move.
• Leaving Canada. You can keep your TFSA if you become a non-resident, but contributions you make while non-resident are taxed at 1% for each month they stay in the account.

In short

• Contributions aren’t deductible, but growth and withdrawals are tax-free and don’t affect federal benefits.
• Room builds every year from the year you turn 18, and unused room carries forward.
• Withdrawals come back as room on January 1 of the next year, not right away.
• Track your own contributions; the excess tax is 1% a month.

Deciding where to put your savings first? See RRSP, TFSA or FHSA: which first?