TFSA

Definition

A Tax-Free Savings Account (TFSA) is a registered plan under ITA s.146.2. Contributions are made with after-tax dollars and are not deductible. Investment income earned inside the plan (interest, dividends, capital gains) and all withdrawals are tax-free. Because withdrawals are not taxable, they do not count as income for OAS, GIS, or GST/HST credit purposes, which makes the TFSA valuable for retirement planning beyond simple tax deferral.

Key rules

• Available to residents aged 18 or older who have a Social Insurance Number.
• 2026 annual dollar limit is $7,000 (the same as 2024 and 2025; confirm on canada.ca at filing time).
• Cumulative TFSA room since program start (January 1, 2009) is approximately $102,000 for a person who has been 18 or older and resident for every year since 2009 and has never contributed.
• Unused room carries forward indefinitely.
• Withdrawals create equivalent re-contribution room, but only in the following calendar year. Re-contributing the same year as a withdrawal is the most common over-contribution mistake.
• Over-contributions trigger a 1% per month penalty tax on the highest excess balance during the month, under s.207.02.
• Contributions are not deductible, so there is no tax refund at contribution time.
• US withholding tax on US dividends still applies inside a TFSA (it is not treated as a pension under the Canada-US treaty). The RRSP avoids this withholding; the TFSA does not.

Example

A BC resident turned 18 in 2015 and has never contributed. Her cumulative TFSA room at the start of 2026 is the sum of annual limits from 2015 through 2026: approximately $85,500.

She contributes $30,000 on January 10, 2026 (well within limit).
The portfolio earns $2,000 of eligible dividends and $3,000 of capital gains during 2026.
On December 1, 2026 she withdraws $10,000.

Tax effect:
  Contribution: not deductible (no tax refund)
  Investment income: not taxed, not reported
  Withdrawal: not taxed, not reported
  Re-contribution room of $10,000 restored on January 1, 2027

Common mistakes

• Re-contributing a withdrawal in the same calendar year, triggering the 1% per-month over-contribution penalty.
• Assuming TFSA room accumulates during years of non-residency. It does not.
• Holding US dividend stocks in a TFSA and forgetting about the 15% US withholding tax.
• Running a business inside a TFSA (frequent day trading), which the CRA can reassess as business income even inside the plan.
• Naming a spouse as a "beneficiary" in a province where "successor holder" is the better designation.

Related concepts

The TFSA complements the RRSP and FHSA and is usually the first account filled when someone is in a low bracket with expected higher future income. Because growth is tax-free, high-growth investments benefit the most. For owner-managers, the TFSA is one of the few ways to shelter growth that is not tied to the tradeoff between deductions and credits.