Tax Free Savings Account TFSA

The TFSA or Tax Free Savings Account is an investment that allows Canadians 18 years and older the opportunity to earn tax free investment income. Each calendar year you can contribute up to the maximum amount for the year (for 2016 the amount is $5500) plus any unused contributions from previous years.

It was introduced by Finance Minister Jim Flaherty in the 2008 Federal Budget and came into effect on January 1, 2009.
At the end of 2012 there were over 9 million Tax Free Savings Accounts.

The Canada Revenue Agency (CRA) announced in November of 2018 that the TFSA limit for 2019 would be $6,000 up $500 from the 2018 limit of $5,500.

How the Tax Free Savings Account Works

The TFSA allows you to contribute save money in a wide range of investment options such as savings accounts, mutual funds, Guaranteed Investment Certificates (GICs) and bonds.
The investment income earned in a TFSA is tax-free and withdrawals are tax-free

The flexible structure of the TFSA allows you to withdraw money from the account at any time free of any taxes or penalties.
Any withdrawals from the TFSA can be put back in future years. Any unused contribution room can be carried forward and accumulates in future years. Contributions to a TFSA are not tax deductible unlike and RRSP where contributions are tax deductible.

Neither income earned within a TFSA nor withdrawals from it affect eligibility for federal income-tested benefits and credits, such as Old Age Security, the Guaranteed Income Supplement, and the Canada Child Tax Benefit. Funds can be given to a spouse or common-law partner for them to invest in their TFSA.

Yearly Contributions

When first introduced the maximum contribution total for the calendar year was $5000.

Starting in 2013 the maximum limit was raised to $5500 and in 2015 the limit has been raised to $10,000.

2009: $5,000
2010: $5,000
2011: $5,000
2012: $5,000
2013: $5,500
2014: $5,500
2015: $10,000
2016: $5,500
2017: $5,500
2018: $5,500
2019: $6,000

Total allowable contribution from 2009 to 2019 = $63,500

People are entitled to make contributions up to these amounts for each year they are aged 18 and older and a resident of Canada.

Any unused contributions from previous years is carried forward.

For example, if you were 18 or older in 2009 and do not have a TFSA and opened one today you could contribute $46,500 to the account.

$5000 for each of the years 2009 - 2012 = $20,000

$5500 for each of 2013, 2014 and 2015 = $16,500

$20,000 + $16,500 = $36,500

The same rules apply if you don't contribute the full amount in a single year.
For example if you only contributed $4000 in 2015 the $1500 you didn't contribute can be added on in later years.

Overcontributions to a Tax Free Savings Account

If you contribute more in a calendar year than your maximum allowed you will have to pay a penalty assessed by The Canadian Revenue Agency (CRA).

CRA figures show that about 74,000 people were sent notices about TFSA over-contributions in the 2012 tax year, compared with 76,000 in 2011 and 103,000 in 2010.

The high number of penalties seems to arise over confusion with regards to recontributions.

You are allowed to withdraw money from a TFSA and recontribute the amount at a later date. However, the recontribution can't occur in the same calendar year.

For example, let's say I contribute the maximum for 2014, $5500 and have no contribution room from previous years. Then in July I take out $1000 and then in August I put $1000 back into my TSFA.
For the calendar year 2014 the total amount contributed is $5500 plus $1000 for a total of $6500. Since the total contribution is $5500 for 2014 I have overcontributed by $1000 and will be penalized.

If you make a withdrawal it is probably best to put the money back in the following year.

For more information on withdrawals see the CRA web site "Making or replacing withdrawals from a TFSA"

As with any investments or investment advice it is best to talk to a Financial Adviser to provide advice that best meets your needs..

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