Last updated: December 22, 2022 | Reviewed by Stuart Dollar
A tax-free savings account (TFSA) is a registered investment account that’s designed to help Canadians save money, while holding qualified investments. Canadian residents ages 18 or older with a valid Social Insurance Number (SIN) can have a TFSA. Any income earned within a TFSA, including interest, dividends and capital gains is tax-free. What’s more, you won’t have to pay tax on any withdrawals you make from a TFSA.
When you open a TFSA with a financial institution, you can contribute to qualified investments. Your investments then have a chance to grow tax-free. Plus, you won’t have to pay tax on money withdrawn from your TFSA. As an example, you can use a TFSA to invest in:
Tax-free growth
Interest, dividends, and capital gains earned in a TFSA are tax-free.
Tax-free withdrawals
Your TFSA withdrawals are also tax-free and can be made whenever you want This is subject to specific terms and rules. In some cases, you may not be permitted to make withdrawals right away. Connect with an advisor for more detailed information.
Save money for any reason
You can use TFSA funds to save up for anything – a house, a wedding, dream vacation, retirement, etc.
To open a TFSA, you must be a Canadian resident age 18 or older. You must also have a valid Social Insurance Number (SIN). You may be able to open a TFSA if you’re a non-resident of Canada with a valid SIN and age 18 or older. But any contributions you make as a non-resident will be subject to a 1% tax for each month the contribution stays in your account. Additional taxes may also apply for non-residents.
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Your TFSA contributions are made from after-tax income. This means that you’ve already paid tax on the money that’s deposited into a TFSA. So you won’t have to pay tax on any income earned (e.g. interest, dividends and capital gains) within a TFSA. And, you won’t have to pay tax when you decide to withdraw those funds.
However, please note that your TFSA contributions aren’t tax deductible Tax deductible refers to an expense that you can subtract from your total income, which can help you reduce your overall tax bill when you file your taxes. For example, RRSP contributions are tax deductible, but TFSA contributions are not tax deductible. Connect with an advisor for more detailed information.. This means you can’t use your TFSA contributions to reduce your overall tax bill when you file your tax return.
TFSA contributions
The TFSA contribution limit for 2023 is $6,500. But the total amount you can contribute really depends on your personal TFSA contribution room. It's up to you to keep track of your limits. Remember that you share your limit with all TFSAs you have in your name. Use CRA's My account for individuals on Canada.ca to check your limit.
TFSA withdrawals
You can withdraw from your TFSA whenever you want, for any purpose. But you’ll want to check if the investments within your TFSA have any withdrawal restrictions.
If you've already maxed out your TFSA contribution room, you still have options. Consider contributing to an RRSP to boost your retirement savings. There are many clever ways to make the TFSA and RRSP work together to improve your wealth. As a general rule, RRSPs are a good choice for longer-term goals such as retirement. But TFSAs may work better for more immediate objectives, such as a wedding or a car. Take a look at these comparisons to understand the differences between a TFSA and RRSP.
If you’ve maxed out both your TFSA and RRSP, then you may consider getting a non-registered account. These are accounts that allow you to hold a variety of investments – with no contribution limits. Unlike an RRSP and a TFSA, you’ll be taxed on any income earned (e.g., interest, dividends and capital gains) within a non-registered account.
Yes. You can use the funds in your TFSA for any reason, including making a down payment on a home.
The main difference is that withdrawals from a TFSA (to buy a home or any other reason) are tax-free, whereas RRSP withdrawals are taxable – unless you’re making RRSP withdrawals under the Home Buyers’ Plan (HBP). Under the HBP, you can withdraw up to $35,000 from your RRSP ($70,000 for a couple) to buy or build a qualifying home in Canada – whether it’s for yourself or for a relative with a disability. When you make withdrawals under the HBP, it’s like you’re borrowing from your RRSP. You’re expected to repay the withdrawn funds within a 15-year period of time. Otherwise, taxes will apply. You must meet certain conditions to participate in the HBP. Talk to an advisor to find out what works best for you.
In the 2022 Federal Budget, the Canadian government announced that they’re creating a new tax-free First Home Savings Account (FHSA) to help Canadian residents save up to $40,000 to buy their first home.
Where available, Canadian residents will be eligible to open a FHSA provided that:
FHSA contributions will be tax-deductible. This means that you can claim a deduction and lower your taxable income, which may reduce the amount of tax you’ll have to pay overall.
And, like a TFSA, investment growth and withdrawals from a FHSA will be tax-free -- that’s provided you use your withdrawals to buy your first home.
What’s more, the lifetime limit on contributions would be $40,000, with an annual contribution limit of $8,000. It’s up to you to know and monitor your contribution limits.
Please remember that the FHSA won’t be available until 2023. Connect with a Sun Life advisor to find out how you can start saving up money to buy a house.
No, you can’t open a TFSA for your child. Your children can open their own TFSAs when they reach age 18. At which point, you can give them the funds to put in the account. However, there are other ways to save money for your children’s future. For example, if you’re looking to save for your child’s future education or training, you can open a registered education savings plan (RESP) on their behalf.
No, a TFSA can be registered only in one person’s name.
No, you can’t contribute directly to your spouse or common-law partner’s TFSA. The TFSA account holder is the only person who can make contributions and withdrawals. However, you can give your spouse or common-law partner money that they can contribute to their own TFSA.
After you die, your TFSA funds will either go to your estate, a designated beneficiary or a successor holder. A beneficiary gets the money within the account, while a successor holder can take over the entire account. You can name anyone as your beneficiary, but only a spouse or common-law partner can be a successor holder. If you don’t have a beneficiary or successor holder, your account will go to your estate.
If you’re a resident of Québec, please note that you can only name a beneficiary or a successor owner to a TFSA held in an insurance product, such as a segregated fund contract or an Insurance GIC.
Learn more about the differences between a beneficiary and a successor holder.
When you die, your TFSA will either go to:
As a successor holder, your spouse or common-law partner can take over your TFSA after you die. They then become the new owner of the TFSA, and the account maintains its tax-free status. And, as the successor holder, they can choose to keep separate TFSAs or merge them with another TFSA in their own name. Learn more about what can happen to your TFSA after you die.
Yes, you can transfer funds from one TFSA to another.
No, you can’t transfer your TFSA to another person.
If you named a beneficiary for your TFSA, then they’ll inherit the funds within your TFSA after you die. At that point, they can transfer those funds into their own TFSA – that’s provided they have TFSA contribution room available. Please note that any income earned within the TFSA between the date of death and the date that the funds are distributed to the beneficiary, will be taxable to the beneficiary. Connect with a Sun Life advisor for more detailed information.
The amount that’s accumulated within the TFSA isn’t taxable to the beneficiary when the account owner dies. But the beneficiaries will have to pay tax on any income earned between the date of the account holder’s death and the date that the full balance is paid out to them.
If you don’t name a successor holder or beneficiary for your TFSA, then it may be subject to probate after you die. Probate is a legal process that confirms the validity of a will and the appointment of an executor (who carries out the terms of your will). Many estates will need probate if there are assets that need to be distributed. If you don’t have a will, then the court will appoint an estate administrator. Get answers to more frequently asked questions about probate.
You can open a TFSA with any financial institution, such as an insurance company or a bank.
You can open as many TFSAs as you want. Keep in mind that regardless of the number of TFSAs you hold, you can’t contribute more than your TFSA contribution room. So be careful not to exceed your TFSA contribution room. Otherwise you will face a tax penalty for over-contributions to your TFSAs. Please remember that it’s up to you to know and monitor your contribution limits. You can find your TFSA contribution room by logging into “My Account” on the Canada Revenue Agency’s (CRA) website.
Open a TFSA
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1The TFSA contribution limit has changed over the years. 2009-2012 - $5,000; 2013-2014 - $5,500; 2015 - $10,000; 2016-2018 - $5,500; 2019 - $6,000. For future years, the amount may be increased in increments of $500 to correspond with the rate of inflation.
2Beneficiary designations are not permitted in Quebec for GIC or mutual fund TFSAs.
