Tax-Free Savings Account (TFSA), introduced by the Federal Government in 2009, allows you to save and invest money without having to pay tax on any of the interest it earns. Withdrawals from your account are also tax-free. 

How the TFSA works

• Contribution to a TFSA will not be deductible for income tax purposes but investment income, including capital gains, earned in a TFSA will not be taxed, even when withdrawn.
• Unused TFSA contribution room can be carried forward to future years.
• The amount withdrawn can be put back in the TFSA at a later date without reducing your contribution room.
• Neither income earned in a TFSA nor withdrawals will affect your eligibility for federal income-tested benefits and credits.
• Contributions to a spouse’s TFSA will be allowed and TFSA assets can be transferred to a spouse upon death.
• For more information go to: https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/tax-free-savings-account.html

What are the benefits? 

• Those who cannot contribute $5,000 from 2009 through 2012 will be able to carry forward their unused contribution room to future years, $5,500 from 2013 through 2014, $10,000 for 2015, $5,500 from 2016 through 2018, $6,000 for 2019 to 2022 and $6,500 for 2023.
• If you withdraw for the TFSA the full amount of the withdrawals can be put back into the TFSA in the future. 
• Canadians can contribute to their spouse’s or common-law partner’s TFSA, depending on the spouse’s or partner’s available room. 
• The TFSA will also provide seniors with a tax-free savings vehicle to meet ongoing savings needs, something they have only limited access to once they reach age 71 and are required to begin drawing down their registered retirement savings. 
• There will be no impact on income-tested benefits. Neither income earned in a TFSA nor withdrawals will affect your eligibility for federal income-tested benefits and credits, such as the Guaranteed Income Supplement and Canada Child Tax Benefit. 

Maximum Contribution Room Calculation 

• When you contribute less than the maximum contribution limit, the difference is referred to as "unused contribution room" and is calculated as follows:
  • Unused contribution room from the prior year, PLUS
  • Contribution limit for the current year, PLUS
  • Withdrawals in the previous year

Example

How is a TFSA different from a Registered Retirement Savings Plan? 

• Contributions to an RRSP are deductible and reduce your income for tax purposes. In contrast, your TFSA savings will not be deductible. 
• Withdrawals from an RRSP are added to your income and taxed at current rates. Your TFSA withdrawals and growth within your account will not – they will be tax-free.