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What is a Tax-Free Savings Account (TFSA)?

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A Tax-Free Savings Account (TFSA) is a type of savings account that allows you to save and invest your money without having to pay any taxes on the earnings. The TFSA was introduced in 2009 by the Canadian Government as a way to help Canadians save for their future. Since then, TFSAs have become a popular way to save and invest money. In fact, the average TFSA account had a value of $22,882 in 2019, with the average annual contribution being $8,160 according to the Canada Revenue Agency (CRA).

Any earnings on your investments in your TFSA (such as interest, dividends, or capital gains) are not taxed, however, the money you deposit into a TFSA can not be used as a tax deduction. There is a maximum amount that you can contribute to your TFSA, known as your TFSA contribution limit, and it increases each year by a certain amount.

You can withdraw money from your TFSA at any time without having to pay any taxes on the withdrawal. You can also make TFSA withdrawals for any reason. This makes TFSAs not just a powerful tool to save for retirement, but also as a flexible emergency fund or a savings fund. For example, you can withdraw money from your TFSA to pay for home renovations, to use towards paying down credit card debt, or even to go on vacation. You won’t need to worry about your income tax bracket and whether or not it is advantageous to withdraw from your RRSP early, since with a TFSA, there is no tax on withdrawals. The amount that you withdraw from your TFSA is added to your next year’s contribution room, which means that you can easily re-contribute to your TFSA.

A tax-free savings account is a type of registered account. A registered account, such as a TFSA or RRSP, is registered with the Canada Revenue Agency. This allows you to receive certain tax benefits. In the case of a TFSA, you’ll be able to earn money from your investments without paying any tax.

A TFSA features no tax both in and out. That’s a significant difference when compared to a registered retirement savings plan (RRSP), where RRSP contributions are tax deductible to reduce your income tax due and where RRSP withdrawals are taxed. Your financial institution will also report your TFSA contributions and withdrawals directly to the CRA. You do not report your TFSA activity, including earnings, contributions, and withdrawals, on your tax return. However, you may be required to file a Tax-Free Savings Account (TFSA) return if you contributed an excess amount over your contribution limit, if you were a non-resident, or if you held non-qualified or prohibited investments.

There are limits to how much money you can put into a TFSA. For 2023 and 2024, the annual contribution limit is, respectively, $6,500 and $7,000. The contribution room was $6,000 from 2019 to 2022. If you don’t use up your annual limit, then the remaining amount is carried forward to future years. This is known as your total lifetime contribution room.

Your total lifetime contribution limit depends on when you turned 18 years of age. The annual TFSA contribution limit has also changed over the years since it was introduced in 2009. If you turned 18 in 2009 or earlier, your cumulative contribution limit would be $95,000 in 2024. This means that if you were born in 1991 or earlier, you would be able to deposit $95,000 into your TFSA in 2024, assuming that you have made no previous contributions already. If you just turned 18 in 2022, you could open a TFSA and contribute up to $7,000 this year. You can use a TFSA contribution limit calculator to easily find out how much you can deposit into a TFSA. You can also track your remaining TFSA contribution room through your CRA account.

The Canada Revenue Agency allows you to hold the following in a TFSA:

• Cash
• Mutual funds
• Bonds
• Guaranteed investment certificates (GICs)
• Securities listed on a designated stock exchange
• Shares of small business corporations
• Gold and silver

Cash in a TFSA

Cash can be held in a TFSA as a deposit in a savings account. It can also be held in a registered account at a brokerage. Many banks and credit unions across Canada offer TFSA high-interest savings account (HISA), often with no monthly fee and with no minimum account balance requirement. These accounts may also feature higher savings interest rates when compared to regular savings accounts.

You can also hold foreign currencies in your TFSA. If you do hold foreign funds, the contribution amount reported to the CRA will be converted to Canadian dollars. For example, if you contribute US$1,000 to your TFSA, and the current USD/CAD exchange rate is $1.30, this means that it would be worth $1,300 Canadian Dollars. When calculating your TFSA contribution limit, your contribution room for the year will be reduced by $1,300, not by $1,000. While holding foreign currency is allowed, which is something offered by many stock and forex trading platforms in Canada, foreign exchange trading (forex trading) is not allowed in a TFSA.

Stocks in a TFSA

Securities, such as stocks and Exchange Traded Fund (ETF) units, would need to be listed on a designated stock exchange. The Department of Finance has a list of designated stock exchanges. This includes the Canadian exchanges: Toronto Stock Exchange (TSX), TSX Venture Exchange (Tiers 1 and 2), Montreal Exchange, Canadian National Stock Exchange (operating as the Canadian Securities Exchange), and Aequitas NEO Exchange. It also includes the American exchanges: the New York Stock Exchange (NYSE), the NASDAQ, BATS Exchange, Nasdaq BX, and the Chicago Board of Options. There are many other exchanges from the US and other countries designated by the finance minister.

If you hold a stock in your TFSA that is not traded on a designated stock exchange, then you may be required to pay significant penalties. The penalty tax payable on non-qualified investments is 50% of the fair market value of the non-qualified investment. This 50% penalty tax can be refunded if you did not know that the investment is non-qualified, and if you sell the non-qualified investment by the end of the following year.

For example, the Moscow Exchange is not a designated stock exchange recognized by Canada. If you purchase a stock listed on the Moscow Exchange and hold it in your TFSA, you will need to pay a 50% penalty. If your non-qualified stock holding was $1,000, then your penalty tax due would be $500.

Cryptocurrencies in a TFSA

Other examples of prohibited investments that cannot be held in a TFSA include buying land and cryptocurrencies. You cannot directly buy cryptocurrencies, such as Bitcoin or Ethereum, in your TFSA or RRSP.

However, one way to hold cryptocurrencies in your TFSA is to purchase a cryptocurrency exchange-traded fund (ETF) that is listed on a designated stock exchange. One example of that is the Purpose Bitcoin ETF (BTCC), which is listed on the Toronto Stock Exchange. Bitcoin ETFs may track the price of Bitcoin directly by holding physical Bitcoin. This means that you can indirectly own Bitcoin in your TFSA through an ETF. A disadvantage of cryptocurrency ETFs is that they charge a fee in order to operate the fund. In the case of the Purpose Bitcoin ETF, the management expense ratio (MER) fee is 1.00%.

Gold and Silver in a TFSA

Certain types of precious metals can be held in a TFSA. Only gold and silver produced by the Royal Canadian Mint or a recognized metal refiner by the London Bullion Market Association can be held in a TFSA. Common types of gold and silver that can be held in a TFSA include:

• Canadian Silver Maple Leaf Coins
• Canadian Gold Maple Leaf Coins
• American Silver Eagles
• American Gold Eagles
• Credit Suisse Gold Bars

Gold must be at least 99.5% pure (0.995 fineness) while silver must be 99.9% pure (0.999 fineness). Gold and silver can be held as either bullion coins, bars, ingots, wafers, or as a certificate. For example, CIBC allows you to purchase gold or silver e-Certificates that you can hold in your TFSA. This makes it easy to purchase gold or silver online, as you won’t need to physically store it. However, CIBC requires a minimum purchase of 5 ounces of gold or 100 ounces of silver in order for an e-certificate to be issued. That can translate to thousands of dollars of gold or silver that would need to be purchased.

Mortgages in a TFSA

Did you know that you can hold certain types of mortgages in a TFSA? Mortgage loans that are insured by the CMHC or by a private insurer can be held in a TFSA. Only insured mortgages are allowed as it prevents self-dealing. There are even services available that allow you to use your TFSA or RRSP funds to invest in private mortgages. For example, Canadian Western Bank allows individuals to use funds in their TFSA to fund private mortgages. You then receive mortgage payments and mortgage interest from your borrower.

You can also invest in mortgages through a mortgage investment corporation (MIC). Shares of MICs that are listed on a designated stock exchange, such as Atrium Mortgage Investment Corporation and MCAN Mortgage Corporation, can be held in your TFSA.

Futures and Options in a TFSA

A derivative is a more complex financial investment than a simple stock or bond. A derivative's price is based on an underlying asset, such as a stock, commodity, currency, or index. The most common types of derivatives are futures contracts, options contracts, and swaps. Derivatives can be used to hedge against risk or to speculate on the future price of an underlying asset.

Futures contracts cannot be held in a TFSA, while some types of options contracts can. That’s because futures involve the possibility of losing more money than you put in. The CRA does not allow TFSAs to borrow money, which is also why you can’t trade on margin with a TFSA. Due to leverage, futures have margin requirements.

Options that do not require margin can be held in a TFSA. This includes:

• Long calls
• Long puts
• Covered calls
• Long straddle
• Long strangle
• Married puts

TFSAs do not allow option strategies that require margin, such as vertical spreads, calendar spreads, naked options, and iron condors. In fact, writing naked calls or uncovered call options that are speculative in nature, and with the goal of generating income by collecting option writing premiums, may even cause the CRA to consider your account to be carrying on a business!

Many banks, credit unions, and brokerages offer TFSAs. You can open a TFSA online, over the phone, or by visiting a branch. There is no limit to the number of TFSAs that you open. This can be across multiple banks or brokerages as well. However, you are limited in the amount of money that you can contribute. You also cannot open a TFSA with someone else. This means that joint TFSAs are not allowed. You also can’t directly contribute to someone else’s TFSA, such as your spouse. However, you can give them money so that they can contribute it to their own TFSA. That’s known as income splitting. You won’t receive any tax deduction, but income splitting with a TFSA allows the lower-income spouse to fully use their contribution room. This allows you and your spouse to fully use and max out your TFSA to grow savings tax-free.

In order to open a TFSA, you must be a Canadian resident with a Social Insurance Number (SIN) and you must have reached the age of majority in your province or territory. In all cases, you cannot open a TFSA if you are under the age of 18.

If you are in a province or territory where the age of majority is 19, you do not lose out on your contribution room! The annual contribution limit for the year that you turned 18 will carry over to the year that you turned 19. Provinces where you cannot open a TFSA until you are 19 include British Columbia and Nova Scotia. The table below shows the age of majority in Canada. Look for the province or territory that applies to you to find out when you can open a TFSA.

There are two types of TFSAs that you can open: a regular TFSA and a self-directed TFSA. A regular TFSA is a type of savings account that you open with a financial institution, such as a bank or credit union. A self-directed TFSA is a type of account that gives you more control over where your money is invested. With a self-directed TFSA, you can invest in things like stocks, bonds, and mutual funds.

If you're not sure which type of TFSA is right for you, it's a good idea to speak with a financial advisor. They can help you understand the pros and cons of each type of TFSA and make a recommendation based on your individual circumstances. This might include the financial knowledge you currently have, your investment goals, and your risk tolerance. Regardless of which type of TFSA you choose, you'll enjoy the same tax benefits.

TFSA withdrawals are not considered to be taxable income. This means that it won’t affect Old Age Security (OAS), Guaranteed Income Supplement (GIS), Employment Insurance (EI), Canada child benefit (CCB), the goods and services tax/harmonized sales tax (GST/HST) credit, and other income-based government benefits.

While you can withdraw from your TFSA at any time, you might be restricted by your investment type. For example, TFSA GICs might lock you in for a certain period of time.

Some banks may charge a fee for transferring out your TFSA to another financial institution. TFSA transfer-out fees are usually $50. This would deregister your TFSA account and transfer out your holdings to a new TFSA account at the target financial institution.

Why transfer your TFSA account instead of selling your holdings and withdrawing cash? While you can avoid paying transfer-out fees by withdrawing cash and then depositing it back into your new TFSA account, this involves using up your TFSA contribution room for that year. If the amount that you wish to transfer is more than your TFSA contribution room, then you would need to wait until the following year in order to complete the full amount of the transfer. This also requires you to sell your holdings, which might result in you selling stocks at an unfavourable time or price. Trading commissions and fees when liquidating your positions will also add up.

Some brokerages may offer rebates that cover the cost of transfer-out fees. For example, Questrade covers the cost of transfer fees, up to $150, when you transfer a registered account to Questrade. RBC Direct Investing rebates up to $200 if you transfer $15,000 or more to RBC from another financial institution. The table below shows the transfer-out fee rebates offered by some Canadian banks and brokerages.

Shorting a stock involves borrowing shares, selling it, and then buying it back at a hopefully lower price. Since you cannot borrow in a TFSA, you cannot short stocks in a TFSA.

TFSAs are also meant for investing and saving, and not for trading. TFSA day trading is not allowed. Frequently trading in your TFSA to generate tax-free income can result in the CRA considering your account to be carrying on a business. This will cause your TFSA to lose its tax-free status, and result in tax being payable on all earnings and capital gains. Accidently day trading might not automatically cause you to be audited by the CRA. For example, you might have a reason for why you needed to sell a stock quickly. During a TFSA audit, the CRA would review all aspects of your TFSA when considering your TFSA's status, including types of holdings, frequency, and duration.

You will need to pay a TFSA over-contribution penalty if you exceed your contribution limits. The penalty is a 1% tax on the excess TFSA amount in a month. This penalty is charged monthly as long as you are over your TFSA contribution room.

For example, let’s say that you over-contributed to your TFSA by $10,000. The 1% tax penalty would be $100 per month. If you remained over your contribution room by $10,000 for a year (12 months), then you would have to pay $1,200 in taxes.

Investment losses in your TFSA will permanently reduce your lifetime contribution room. That's because you initially contributed into your account, but you're not able to withdraw the same amount back out. Selling stocks for a loss in a TFSA will lock-in your capital loss.

To illustrate this, we can take a look at an extreme case where you have lost everything in your TFSA. Let’s say that your cumulative contribution room is $81,500. You deposit $81,500 in 2022, which means that you have fully used up your contribution room. You invest fully in a certain stock, and the stock’s value goes to zero. You then sell the stock for $0. The amount that you can withdraw from the TFSA is $0. How much can you contribute next year? Since the annual contribution limit for 2023 is $6,500, you would only be able to contribute $6,500 next year, not the $81,500 that you have lost.

The opposite would occur if the value of your TFSA grows. Gains in your TFSA will increase your TFSA’s contribution room should you withdraw more than your original cumulative contributions. For example, let’s say that you initially contributed $10,000. With a diverse portfolio of REITs and ETFs, the value of your TFSA increases to $15,000. That represents a $5,000 capital gain. You sell your REIT and ETF holdings and withdraw $15,000 from your TFSA account. Since the $15,000 withdrawn this year will be added to your next year’s contribution room, your lifetime TFSA contribution room has effectively grown by an additional $5,000.

Investing in risky assets might not be such a good idea with a TFSA due to the possibility of losing future contribution room should you incur losses. However, if your investments work out, you could enjoy large gains that are tax-free.

There is no inheritance tax in Canada. TFSA holders can designate a successor holder or beneficiaries in their TFSA contract or will. When the owner of the TFSA dies, the successor holder or the beneficiary will receive the TFSA tax-free. However, there are differences between these two designations.

With a successor, the successor holder will become the new holder of the TFSA. The TFSA remains tax-free, and this includes any earnings after the date of the original owner’s death. The successor will now have two TFSAs. The successor can either choose to keep the inherited TFSA open or consolidate TFSAs without affecting their TFSA contribution room. Non-residents can still be designated as a successor, however, they will need to apply for an individual tax number (ITN).

With beneficiaries, earnings in the TFSA that occur after the date of the TFSA owner's death becomes taxable. That’s because there is no successor holder of the TFSA keeping the tax-free status of the account active. Only the earnings in the TFSA that occurred during the life of the TFSA owner will remain tax-free. This means that between the time of the owner’s death and the time that the account is closed, the earnings in the TFSA are taxable to the successor or beneficiary. The amount that the beneficiary can withdraw tax-free is the fair market value of the TFSA at the time of the owner’s death.

A beneficiary can also choose to contribute the amounts that they have withdrawn from the deceased's TFSA into their own TFSA. This contribution would be an exempt contribution, which means that it won't affect their contribution room. However, this will need to be completed before the end of the following year of the original account holder's death.

If there is no successor or beneficiary, then the account holder's estate will distribute it according to the will.

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The main difference between a TFSA and an RRSP (registered retirement savings plan) is the tax treatment of each account. With an RRSP, you receive a tax deduction on your contribution. This allows you to invest money that hasn’t been taxed yet. In other words, an RRSP allows you to invest money using your pre-tax income. Since you save money on taxes, you can save more money than you would have been able to otherwise.

However, you will pay income tax on RRSP withdrawals. This defers tax into the future. It can be beneficial for those currently in a high tax-bracket. High-income earners will be able to avoid paying their high marginal tax rate on their RRSP contributions. When they eventually withdraw from the RRSP, ideally when they are earning less income and are in a lower tax bracket, then they would pay a lower income tax rate.

With a TFSA, you do not receive a tax deduction on contributions. This means that you will need to pay income tax on the amount that you contribute towards your TFSA. In return, TFSA withdrawals are not taxed. That’s because you have already paid income tax on your contribution amount.

Knowing whether a TFSA or RRSP is better would depend on your personal situation. Current high-income earners will most likely be better off maxing out their RRSP before contributing towards their TFSA. If you’re already in a low tax bracket and you expect to make more money in the future, then an RRSP might not be the best option for you, as that may cause your RRSP withdrawals to be taxed at a higher tax bracket.

Instead of a flat annual contribution limit that applies to everyone in the case of TFSAs, your RRSP contribution limit depends on your income. For 2021, the RRSP contribution is either 18% of your income or $27,830, whichever is lower. If you have no income, then you won’t have any RRSP room.

The Canada Revenue Agency publishes statistics of TFSAs in Canada. According to the CRA, 15.3 million Canadians had a TFSA in 2019. There were 22.3 million TFSAs, which means that the average Canadian holder had 1.5 TFSAs.

Only 1.38 million Canadians maximized their TFSA contributions in 2019. In fact, just under half of all TFSA accounts in Canada had no transactions throughout the entire year of 2019.

In 2019, Canadians contributed $71.5 billion towards their TFSAs. The average Canadian contributed $8,160 to their TFSA, with an average of 15 contributions per year. Just under $38 billion was withdrawn from TFSAs in 2019, with the average Canadian withdrawing $8,117 from their TFSA.

The average TFSA holder had $22,882 in their TFSA account, with an average unused TFSA contribution room of $37,833. This amount varies significantly depending on the age of the account holder. For example, those aged 20 to 24 had an average of $5,979 in their TFSA, while those aged 60 to 64 had an average of $31,211 in their TFSA.

It also varies by province. British Columbia was the province with the highest average TFSA value, at $24,811 per individual. Nunavut had the lowest average value, at just $8,727 per individual.

TFSA holders in higher income classes also hold a greater number of TFSAs on average. For example, those who had an income between $40,000 to $44,999 held an average of 1.4 TFSAs. Meanwhile, those with an income over $250,000 held an average of 1.6 TFAs.

High-income earners are also more likely to max out their TFSAs. For those earning $250,000 and over, 32% contributed the maximum allowed. For those earning $40,000 to $44,999, only 13% contributed the maximum allowed.