Savings accounts in Canada: TFSA

The Tax-Free Savings Account (TFSA) was introduced in Canada in 2009 as a means of encouraging residents to save. This account offers tax advantages, as all contributions, income from investments, and withdrawals made through the TFSA are tax-free. Imagine this: you get your paycheck from your employer and pay a portion of this income to the government as tax. In addition, you move your net pay into a TFSA where all interest income, investment value increase, capital gains, and withdrawals are tax-free. It provides greater benefits compared to conventional savings accounts. 

Each year, the Canadian government determines the contribution limit, which forms part of the contribution room. For example, the contribution limit for 2023 is $6,500, meaning individuals can contribute up to $6,500 to their TFSA that year. It’s important to note that withdrawals from the account count against the contribution limit. Let’s consider an example: John Doe deposits $2,000 in February 2023, leaving a contribution room of $4,500. If John decides to withdraw $1,000, reducing his balance to $1,000, his contribution room remains at $4,500 and doesn’t increase to $5,500. It’s advisable to contribute to a TFSA when you’re confident that the funds won’t be needed in the short term.

Contributions exceeding the limit are subject to a tax of 1% per month on the excess amount remaining in the account. For instance, if John Doe deposits $2,000 each month from February to June 2023, resulting in a total balance of $10,000 at the end of May, he has exceeded the contribution limit by $3,500. The excess amount of $3,500 would be subject to a 1% tax per month until it’s withdrawn. It’s important to remember that management or investment fees, income or losses from investments, and changes in investment value do not affect the contribution room for the year. For instance, John Doe buys a stock at $1,000, which increases in value to $1,200. The $200 increase does not take a part of John’s contribution room.

An individual’s contribution room is determined by the annual limit, any unused contribution room from previous years, and any withdrawals. For example, if John Doe contributed $5,000 in 2021, fully utilizing his contribution room, and only contributed $1,000 in 2022 despite having a contribution room of $6,000, along with a $2,000 withdrawal in 2022, his contribution for 2023 would be calculated as follows: $6,000 (contribution limit for 2022) – $1,000 (actual contribution made) + $2,000 (withdrawal made) + $6,500 (contribution limit for 2023) = $13,500. To find their contribution room, individuals can access the “my account” section on the Canada Revenue Agency (CRA) website or request a TFSA room statement and TFSA transaction summary.

To be eligible for a TFSA, an individual must be over 18 years old, a resident of Canada, and have a valid Social Insurance Number (SIN). While there’s no limit to the number of TFSAs one can open, the total contributions across all accounts cannot exceed the contribution room for the year. Contributions made in currencies other than Canadian dollars would need to be converted. Transferring funds from one TFSA to another is not considered a withdrawal. The contribution room is not prorated for individuals who become residents or turn 18 in a given year, and it doesn’t accumulate during periods when an individual is not a resident of Canada, even if they turned 18 during that time.

The Tax-Free Savings Account (TFSA) introduced in Canada in 2009 allows individuals to accumulate contribution room year after year if it remains unused. For example, if someone turned 18 in 2009 but hasn’t opened a TFSA until 2023, they would have an accumulated contribution room from 2009 up to the present. Assuming an annual contribution room of $5,000 since 2009, a person like John Doe, who turned 18 in 2009, can contribute a maximum of $70,000 in 2023, regardless of the contribution room for that specific year (14 years x $5,000).

Opening a TFSA is straightforward and can be done through various channels such as online brokerages, banks, or private management firms. While money saved in a TFSA accrues interest, the best way to maximize earnings is by investing through the account, as all capital gains are not subject to tax. However, it’s important to note that investments in US companies yielding dividends are subject to a 15% withholding tax. Instead of keeping cash in the account, individuals can explore different investment options based on their risk appetite, taking into account investment fees and potential returns.

One of the advantages of a TFSA is its flexibility in withdrawals. Funds can be easily withdrawn from the account without incurring fees or tax implications. This feature makes a TFSA an attractive option for an emergency fund.

In conclusion, the Tax-Free Savings Account (TFSA) has emerged as a valuable savings tool in Canada since its introduction in 2009. Offering tax advantages, flexibility, and the potential for tax-free investment growth, the TFSA has incentivized residents to save and build their financial security. Whether saving for long-term goals, investing for growth, or preparing for unexpected expenses, the TFSA offers a tax-free solution that empowers individuals to secure their financial futures.


Agency, C. R. (2023, January 6). Government of Canada. Retrieved May 1, 2023, from

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