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Tax-Free Savings Account (Canada)

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The Tax-Free Savings Account (TFSA, French: Compte d'épargne libre d'impôt, CELI) is an account available in Canada that provides tax benefits for saving. Investment income, including capital gains and dividends, earned in a TFSA is not taxed in most cases, even when withdrawn. Contributions to a TFSA are not deductible for income tax purposes, unlike contributions to a Registered Retirement Savings Plan (RRSP).

Despite the name, a TFSA does not have to be a cash savings account. Like an RRSP, a TFSA may contain cash and/or other investments such as mutual funds, certain stocks, bonds, or Guaranteed Investment Certificates (GICs).[1] The cash on hand in a TFSA will collect interest just like a regular savings account, except that the interest will be tax free.



The first Tax-Free Savings Account was introduced by Jim Flaherty, then Canadian federal Minister of Finance, in the 2008 federal budget. It came into effect on January 1, 2009.[2]

This measure was supported by the C.D. Howe Institute, which stated; “This tax policy gem is very good news for Canadians, and Mr. Flaherty and his government deserve credit for a novel program”.[3] Furthermore, the Canadian Federation of Independent Business,[4] Canadian Bankers Association,[5] Bank of Montreal economist Doug Porter,[4] the Canadian Chamber of Commerce,[6] and the Canadian Taxpayers Federation[7] also supported this tax policy. In 2015 South Africa introduced TFSA accounts to encourage low to middle-class citizens to save money.

Canadian featuresEdit

The TFSA is an account in which Canadian residents 18 years and older can save or invest. Income earned on contributions is not taxed. The TFSA account-holder may withdraw money from the account at any time, free of taxes.

Contribution roomEdit

The maximum annual contribution room for each year prior to 2013 was $5,000 per year. Beginning in 2013 it was increased to $5,500 per year.[8] The $5,500 annual contribution limit was indexed to the Consumer Price Index (CPI), in $500 increments, in order to account for inflation.[9]

The 2015 federal budget raised the contribution limit to $10,000, and eliminated indexation for inflation, beginning with the 2015 tax year.[10] However, in December 2015 a newly elected government proposed to restore the pre-2015 contribution limit of $5,500 for 2016, which will be indexed for inflation after that.[11][12][13]

As of January 1, 2019, the total cumulative contribution room for a TFSA is $63,500 for those who have been 18 years or older and residents of Canada for all eligible years.

Years TFSA Annual Limit Cumulative Total
2009–2012 $5,000 $20,000
2013–2014 $5,500 $31,000
2015 $10,000 $41,000
2016–2018 $5,500 $57,500
2019 $6,000 $63,500

Any unused contribution room under the cap can be carried forward to subsequent years, without any upward limit.[14]

Eligible investmentsEdit

A TFSA can hold any investments that are RRSP-eligible, including publicly traded shares on eligible exchanges, eligible shares of private corporations, certain debt obligations, instalment receipts, money denominated in any currency, trust interests including mutual funds and real estate investment trusts, annuity contracts, warrants, rights and options, registered investments, royalty units, partnership units, and depository receipts.[15]

Creditor protectionEdit

Assets within a TFSA are not protected from creditors in the event of bankruptcy or a financial judgement that results from legal proceedings against the account-holder, whereas those within an RRSP are protected. Unless the investments in the TFSA are in a segregated fund (which then follows the Insurance act rules).


A withdrawal in any year will increase the available contribution room, not in the year of withdrawal, but on January 1 of the following year. An over-contribution will occur if an individual (whose TFSA contributions have already been maximized for the year) mistakenly believes that a withdrawal immediately creates contribution room and re-contributes the withdrawn funds later the same calendar year. At any time in the year, if an individual contributes more than their allowable TFSA contribution room, they will be considered to be over-contributing to their TFSA and will be subject to a tax equal to 1% of the highest excess TFSA amount in the month, for each month that the excess amount remains in their account[16].

In the 2012 tax year, the CRA sent notices to about 74,000 taxpayers about TFSA over-contributions, out of about nine million TFSAs existing at the end of 2012. About 76,000 notices were sent in 2011 and 103,000 in 2010.[17]

Foreign dividend withholding taxEdit

Unlike an RRSP, a TFSA is not considered by the United States Internal Revenue Service to be a pension plan. Therefore, the tax treaty between the U.S. and Canada foregoing the U.S. withholding tax on dividends in registered pension plans does not apply to TFSA accounts, subjecting Canadians in most cases to a 15% U.S. tax withheld on dividends paid on shares of U.S. corporations. The tax withheld cannot be credited against other payable taxes as would be the case with non-registered accounts.

To get around this problem, one exchange-traded fund manager, Horizons ETFs Group, offers an ETF that uses swap contracts to replicate the return of the underlying dividend-paying stocks in the fund without actually holding any of those stocks. However, due to the fees charged by the counterparty to the swap agreement, as well as the fund's own management fee, its expenses exceed the actual withholding tax payable for the underlying stocks, if those were to be held directly in the TFSA.[18][19][20][21][22][23]

Risks for U.S. citizens and U.S residentsEdit

Canadian mutual funds held in TFSAs are generally considered by the IRS to be investments in a passive foreign investment company (PFIC), and must be reported as such (on form 8621) by U.S. citizens. PFICs can be very disadvantageous as, absent certain elections, "excess" distributions are always taxed at the highest marginal rate. Also, income is averaged over the duration of the investment, and interest is then charged from the date the income is deemed to have occurred, resulting in effective tax rates as high as 50% or more.[24][25] The TFSA may also be a grantor foreign trust from the perspective of the U.S. U.S. citizens with a grantor foreign trust are required to file IRS Forms 3520A (due March 15) and 3520 (due at the same time as Form 1040). These forms are both complicated and both involve potentially large penalties for late filing. Like other non-U.S. accounts the TFSA may also need to be included on a U.S. citizen's FBAR and tax-FBAR. Earnings inside the TFSA are taxed by the U.S.

Comparison to RRSPEdit

The tax treatment of a TFSA is the opposite of a Registered Retirement Savings Plan (RRSP). There is an income tax deduction for contributions to an RRSP, and withdrawals of contributions and investment income are all taxable. In contrast, there is no tax deduction for contributions to a TFSA, and there is no tax on withdrawals of investment income or contributions from the account.

Unlike an RRSP, which must be withdrawn before the holder turns 71, the TFSA does not expire.

If an account-holder withdraws funds from a TFSA, his or her contribution room is increased by that amount on 1 January after the withdrawal. In an RRSP, the contribution room is not increased to reflect withdrawals.

The Canada Revenue Agency (CRA) describes the difference between a TFSA and an RRSP as follows: "An RRSP is primarily intended for retirement. The TFSA is like an RRSP for everything else in your life." Interest paid on money borrowed to invest in either TFSA or RRSP is not tax deductible.[26]

Similar accounts in other countriesEdit

The TFSA is similar to a Roth Individual Retirement Arrangement in United States, although the TFSA has fewer restrictions.[clarification needed][27] In the UK, similar tax advantages have been available in Individual Savings Accounts since 1999.[28]

In South Africa, TFSAs were launched on March 1, 2015. [29]

See alsoEdit


  1. ^ Canada Revenue Agency (2014-02-14). "TFSA: Types of investments". Retrieved 2014-06-14.
  2. ^ “Get ready for new Tax-Free Savings Account”, Oakville Today, 2008-06-19. Retrieved on 2008-06-20.
  3. ^ “TFSA’s: the biggest thing since RRSP’s”, National Post, 2008-02-27. Retrieved on 2008-06-23.
  4. ^ a b “Budget: Report Card”, National Post, 2008-02-26. Retrieved on 2008-06-23.
  5. ^ “Federal Budget Prudent for Today’s Economic Conditions”, Canadian Bankers Association, 2008-02-26. Retrieved on 2008-06-23.
  6. ^ “2008 Budget”, The Canadian Chamber of Commerce, 2008-02-26. Retrieved on 2008-06-23.
  7. ^ "A New Tax Savings Plan & Modest Spending Growth”, Canadian Taxpayers Association, 2008-02-26. Retrieved on 2008-06-23.
  8. ^ "The Tax-Free Savings Account". Canada Revenue Agency. Retrieved 30 December 2012.
  9. ^ TFSA contribution room,
  10. ^ Evans, Pete (21 April 2015). "Budget 2015: TFSA limit hiked to $10,000 as election budget delivers few goodies". CBC/Radio-Canada. Retrieved 21 April 2015.
  11. ^ Notice of Ways and Means Motion to amend the Income Tax Act
  12. ^ Liberals detail how they will roll back TFSA contribution limits, The Globe and Mail, 7 December 2015
  13. ^ Bill Morneau confirms tax cuts coming for 'middle class', CBC News, 7 December 2015
  14. ^ "Tories Introduce Tax-Free Savings Account", CTV, 2008-02-26. Retrieved on 2008-06-20.
  15. ^
  16. ^ Agency, Canada Revenue; Agency, Canada Revenue (2010-03-02). "Contributions". aem. Retrieved 2019-02-15.
  17. ^ ""Misunderstanding this simple TFSA rule could cost you a lot", by Rob Carrick, The Globe and Mail, Wednesday, Feb. 26 2014". Archived from the original on 2015-10-10. Retrieved 2017-09-15.
  18. ^ Your tax, RRSP questions answered The Globe and Mail, 1 December 2010
  19. ^ ‘Where should I hold U.S. dividend stocks?’ Financial Post, 16 April 2013
  20. ^ Understanding Swap-Based ETFs MoneySense, 6 June 2011
  21. ^ Foreign dividend withholding tax and your TFSA The Globe and Mail, 4 April 2013
  22. ^ More Swap Talk With Horizons Canadian Couch Potato, 10 June 2011
  23. ^ HXS Horizons S&P 500 Index ETF, retrieved 12 January 2014
  24. ^
  25. ^ "Archived copy" (PDF). Archived from the original (PDF) on 2014-07-14. Retrieved 2014-06-11.CS1 maint: Archived copy as title (link)
  26. ^ "2015 TFSA update". The Tax Group. Retrieved 10 February 2016.
  27. ^ How the 'TIFSA' can be your tax free nest egg
  28. ^ "Cashing in on TFSAs" (PDF). Benefits Canada. May 2008. Retrieved 2009-02-17.[permanent dead link]
  29. ^ "Tax-free investments". South African Revenue Service. June 2018. Retrieved 2019-04-27.

External linksEdit