The Tax-Free Savings Account (TFSA) program was introduced by the Canadian government in the 2008 Federal Budget. It provides an opportunity for any resident of Canada (including foreign students, Workers, Permanent Residents) over the age of 18 to save and invest tax-free.
The TFSA is a registered account like the Registered Retirement Savings Plan (RRSP). Unlike the RRSP, contributions to the TFSA are not deductible for income tax purposes, however, any capital gains, dividends, or interests generated on your TFSA investment are tax-sheltered for life!
TFSA 2021 Update:
Based on the updated indexation factors released by the government for next year’s income tax brackets and federal credits, the annual TFSA contribution limit for 2021 is $6,000!
TFSA Rules and Amounts
- You must be 18 years of age or older, be a resident of Canada and have a valid social insurance number.
- You can invest in almost anything through your TFSA including Guaranteed Investment Certificates (GICs), bonds, mutual funds, stocks, etc. Dividend income from a foreign country may be subject to foreign withholding tax.
- You can withdraw money from your account at any time, for any reason, tax-free.
- You can re-contribute any amount you withdraw in the following year plus your contribution room for that year. Say you withdraw $5,000 from your TFSA this year (2020) to pay for an emergency. In 2021, you will be able to contribute that $5,000 plus your regular $6,000 contribution room for 2021.
- Do not contribute over your limit. Excess contributions to your TFSA will be subject to a 1% tax on the excess contributions per month until you remove it. If you have been a resident of Canada since 2009, this means you have a total contribution room of $75,500 (updated for 2021). If in doubt about your TFSA limit, you can contact Canada Revenue Agency (via My Account) or use the Tax Information Phone Service.
- The TFSA does not affect your eligibility for other Federal government benefits or credits that are based on your income earning level. It will not affect your assessment for Old Age Security (OAS), Canada Child Benefits (CCB), Working Income Tax Benefit (WITB), Goods and Services Tax or Harmonized Sales Tax credit (GST/HST).
- You can give money to a spouse or partner to put in their TFSA account without running afoul of Canada Revenue Agency’s attribution rule.
- You can open more than one TFSA account and can transfer funds from one account to the other. However, the transfer must be a direct transfer between the account issuers. You should not transfer the funds yourself.
- Capital gains or investment income generated on a TFSA are not taxed. However, you cannot claim a capital loss for any losses incurred in your account.
TFSA Limit for 2021
The annual TFSA contribution room is indexed to inflation.
The annual contribution limit for 2017 was $5,500. Due to persistently low inflation rates over the last few years and the way annual TFSA limits are rounded off to the nearest $500, the contribution limit remained at $5,500 in 2018 as well. However, in 2019, it increased to $6,000 and the amount has stayed the same for 2020 and 2021.
You can carry forward unused TFSA contribution room indefinitely. The contribution limits over the years have been:
Related: How To Open A CRA My Account
Investment Ideas for your TFSA
The TFSA is a great way to put compound interest to work, grow your investments, while also keeping the tax man away from your profits.
A couple of savings/investment options for your TFSA include:
1. High-interest savings account
Interest earned on savings accounts is pretty low in Canada right now. For example, RBC’s current interest rate on a TFSA savings account is 0.05% per year (December 8, 2020).
You can find higher savings rates being offered by online banks including EQ Bank and Tangerine.
- EQ Bank TFSA Savings Account: is currently offering a 2.30%* interest rate which is one of the highest in Canada right now. The account has no monthly fees or minimum balance and you can make withdrawals at any time.
When investing for the longer term, a high-interest savings account may not cut it for you. This is because the overall rate of return is still much lower than what is available when you invest in the stock market.
However, for short-term investments, such as when saving for a house down payment or setting up an emergency fund, these savings accounts come in handy.
Robo-advisors simplify the investment process while lowering your investment costs and maximizing your returns. There are a good number of robo-advisors in Canada, but my #1 choice is currently Wealthsimple.
You can read about and compare all the major Robo-Advisors in Canada.
- When you open an account with Wealthsimple using this promo link, you receive a $50 cash bonus!
3. Exchange-Traded Funds
Exchange-traded funds (ETFs) are similar to mutual funds, except that ETFs are traded on exchanges like stocks and offer much lower management fees. Also, ETFs offer a wide selection to choose from, and you may need to pay trading commissions when you buy or sell.
ETFs are a great investing tool, and these days, building an ETF portfolio on your own is a lot easier using all-in-one ETFs, such as:
Want to buy and sell your own stocks and ETFs directly? Check out Wealthsimple Trade for no-fee trading and a $10 cash bonus.
4. Mutual/Index funds
There are several mutual fund offerings by the big banks and others. You can open a TFSA and buy mutual funds or index funds. A line of good index fund options if you are planning on making small regular contributions are the TD e-Series Funds.
I use the TD E-Series Funds for one of my TFSA accounts. Compared to the average actively-managed mutual fund, the Management Expense Ratios (MER) for e-Series funds are lower and there are no set-up or commission fees.
You can find some other index fund options here.