Tax-Free Savings Account

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The Tax-Free Savings Account (TFSA) is an account that provides tax benefits for saving in Canada. Investment income, including capital gains and dividends, earned in a TFSA is not taxed, even when withdrawn.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 Tax-Free Savings Account was introduced by Jim Flaherty, 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,[6] the Canadian Chamber of Commerce,[7] and the Canadian Taxpayers Federation[8] also supported this tax policy.


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 room[edit]

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.[9] The $5,500 annual contribution limit is indexed to the Consumer Price Index (CPI), in $500 increments, in order to account for inflation.[10][better source needed]

The 2015 Canadian federal budget proposes to raise the contribution limit to $10,000, and eliminate indexation for inflation, beginning with the 2015 tax year.[11]

As of 2015, the total cumulative contribution room for a TFSA is $41,000.

Years TFSA Annual Limit Cumulative Total
2009-2012 $5,000 $20,000
2013 $5,500 $25,500
2014 $5,500 $31,000
2015 $10,000[12] $41,000

Any unused contribution room under the cap can be carried forward to subsequent years, without any upward limit.[13]

Eligible investments[edit]

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, installment 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.[14]

Creditor protection[edit]

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.


A withdrawal in the year will increase the available contribution room, not in the current calendar year, but on January 1 of the following year. An over-contribution may occur when an individual (who has already maximized his TFSA contributions) might have the mistaken belief that a withdrawal from the TFSA will immediately create contribution room and 're-contribute' the withdrawn funds later in the same calendar year.

In the 2012 tax year CRA sent notices to about 74,000 taxpayers about TFSA over-contributions, compared to about nine million TFSAs existing at the end of 2012. About 76,000 notices were sent in 2011 and 103,000 in 2010.[15]

Foreign dividend withholding tax[edit]

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.[16][17][18][19][20][21]

Risks for U.S. citizens[edit]

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.[22][23] 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 RRSP[edit]

The tax treatment of a TFSA is the opposite of a Registered Retirement Savings Plan (RRSP). There is a 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 in the tax year 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."

Similar accounts in other countries[edit]

The TFSA is similar to a Roth Individual Retirement Arrangement in United States, although the TFSA has fewer restrictions.[clarification needed][24] In the UK, similar tax advantages have been available in Individual Savings Accounts since 1999.[25]

See also[edit]


  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. ^ “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. ^ “Budget: Report Card”, National Post, 2008-02-26. Retrieved on 2008-06-23.
  7. ^ “2008 Budget”, The Canadian Chamber of Commerce, 2008-02-26. Retrieved on 2008-06-23.
  8. ^ "A New Tax Savings Plan & Modest Spending Growth”, Canadian Taxpayers Association, 2008-02-26. Retrieved on 2008-06-23.
  9. ^ "The Tax-Free Savings Account". Canada Revenue Agency. Retrieved 30 December 2012. 
  10. ^ "Tax Measures: Supplementary Information", Department of Finance, 2008-02-26. Retrieved on 2008-06-20.
  11. ^ 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. 
  12. ^
  13. ^ "Tories Introduce Tax-Free Savings Account", CTV, 2008-02-26. Retrieved on 2008-06-20.
  14. ^
  15. ^ "Misunderstanding this simple TFSA rule could cost you a lot", by Rob Carrick, The Globe and Mail, Wednesday, Feb. 26 2014
  16. ^ Your tax, RRSP questions answered The Globe and Mail, 1 December 2010
  17. ^ ‘Where should I hold U.S. dividend stocks?’ Financial Post, 16 April 2013
  18. ^ Understanding Swap-Based ETFs MoneySense, 6 June 2011
  19. ^ Foreign dividend withholding tax and your TFSA The Globe and Mail, 4 April 2013
  20. ^ More Swap Talk With Horizons Canadian Couch Potato, 10 June 2011
  21. ^ HXS Horizons S&P 500 Index ETF, retrieved 12 January 2014
  22. ^
  23. ^
  24. ^ How the 'TIFSA' can be your tax free nest egg
  25. ^ "Cashing in on TFSAs" (PDF). Benefits Canada. May 2008. Retrieved 2009-02-17. 

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