Tax Free Savings Account (TFSA)
The TFSA allows Canadians to set money aside in eligible investment vehicles and watch those savings grow tax-free throughout their lifetimes. TFSA savings can be used for any purpose, such as to purchase a new car, renovate a house, start a small business or take a family vacation.
How the TFSA Works
- Starting in 2009, if you are a Canadian resident aged 18 and older, you can save up to $5,000 every year in a TFSA. As of January 2024 the life time contribution room is $95,000
- Your contributions into a TFSA are not deductible for income tax purposes but the investment income, including capital gains , earned in your TFSA is not taxed, even when withdrawn.
- Your unused TFSA contribution room is carried forward and accumulates for future years.
- You can withdraw funds available in your TFSA at any time for any purpose, and the full amount of withdrawals can be put back into your TFSA in future years.
- Neither income earned in a TFSA nor withdrawals affect your eligibility for federal income-tested benefits and credits.
- You can provide funds to your spouse or common-law partner to invest in their TFSA.
- TFSA assets can generally be transferred to a spouse or common-law partner upon death.
How is a TFSA Different from a Registered Retirement Savings Plan?
An RRSP is primarily intended for retirement.
Both plans offer tax advantages. TFSA allows you to accumulate investment income tax-free within the account, bwhile growth in an RRSP is tax deferred.
- Contributions to an RRSP are deductible and reduce your income for tax purposes. In contrast, your TFSA savings contributions are not deductible.
- Withdrawals from an RRSP are added to your income and taxed at current rates. Your TFSA withdrawals and growth within your account are not included in your income – they are tax free.