TFSA - General Rules

In order to encourage Canadians to increase their savings, in 2009 Finance Canada and Canada Revenue Agency ("CRA") introduced a new type of savings vehicle: the Tax-Free Savings Account ("TFSA"). Any interest, capital gains and other investment income that you earn in your TFSA is exempt from income tax both while it stays in the TFSA as well as when you withdraw the income from your account.

Every Canadian resident, who is at least 18 years old, and has a Social Insurance Number, is eligible to open a TFSA, and contribute up to $5,000 per calendar year. You can accumulate contribution room if you don’t contribute the full amount in a year, meaning that if you have not used your full contribution room in previous years, you can carryforward the unused amount to future years.

Most banks now offer a savings account product that qualifies as a TFSA. However, the TFSA program is not limited to bank accounts – certain mutual funds and brokerage accounts also qualify.

Difference between TFSAs and RRSPs TFSAs and RRSPs both shelter your investments from tax while they are held in the account. However, the treatment of contributions and withdrawals differs.

RRSP contributions come from before-tax dollars, because these contributions reduce your taxable income in the year of the contribution. Furthermore, when the time comes that you withdraw contributions and investment income from your RRSP, your withdrawals are fully taxable as income in the year of withdrawal. For example: in 2016, your net income is $50,000. You contribute $5,000 to your RRSP, and as a result, your taxable income is reduced to $45,000. In 2021, your $5,000 RRSP investment has grown to $7,000. You withdraw the $7,000 in 2021. The full amount of $7,000 will be added to your taxable income in 2021.

In contrast, TFSA contributions are made with after-tax dollars, and do not reduce your taxable income in the year of the contribution. However, when you withdraw contributions and investment income from your TFSA, the withdrawals do not increase your taxable income – in other words, TFSA withdrawals are tax-free. For example: in 2016, your net income is $50,000. You contribute $5,000 to your TFSA. Your taxable income is unaffected, and remains at $50,000. In 2021, your $5,000 TFSA investment has grown to $7,000. You withdraw the $7,000 in 2021. The full amount of $7,000 is tax-free, and will not be added to your taxable income in 2021.

If you are deciding between investing in an RRSP or a TFSA, consult one of our Toronto income tax lawyers.


We mentioned earlier that you are allowed to contribute up to $5,000 to your TFSA in each year. However, withdrawals from your TFSA do not affect your contribution limit within the same year. For example, let’s say you contributed $5,000 to your TFSA in June 2015, and then withdrew $2,000 in September 2015. Although you would only be left with a balance of $3,000 in your TFSA, you would still have used up your $5,000 contribution room for 2015. If you were to redeposit the $2,000 in October 2015, you would have contributed a total of $7,000 in the 2015 taxation year, even though your TFSA account balance would then be sitting at $5,000. CRA would consider you to have made an over-contribution of $2,000, and would charge you a penalty tax.

If this seems counterintuitive to you, you’re not alone. In 2010, at least 70,000 Canadians, who were similarly confused, were contacted by CRA requesting information about their TFSA deposits and withdrawals, apparently relating to over-contributions. CRA claims to have been lenient in that first year, at least where net contributions were below the contribution limit. However, they are now strictly enforcing the penalty taxes for over-contribution. This penalty tax is calculated based upon the highest excess balance in the TFSA in each month, and the penalty is 1% of this amount each month. As such, it is very important to keep track of your contributions in a year, and ensure that they do not exceed the contribution room you have available.

While withdrawals do not make space for additional contributions within the same year, your contribution room is corrected for withdrawals in the following year. So had you contributed $5,000 to your TFSA in June 2015, and then withdrawn $2,000 in September 2015, you would have used up your 2015 contribution room. But in 2016, your contribution room would be adjusted for 2015 withdrawals, and your 2016 total contribution room would be calculated as follows:

  • $5,000 (2016 new contribution room) + $2,000 (credit for 2015 withdrawals) = $7,000 total contribution room in 2016.
  • n this example, you would then be able to contribute up to $7,000 to your TFSA in 2016 without incurring a penalty.

Income Tax Notice of Assessment

When you file a tax return, your Notice of Assessment issued by CRA will state the amount of TFSA contribution room available to you as of the date of the assessment, and this amount should have been adjusted to compensate for any withdrawals made in the previous year.

Transfers between TFSAs

It is possible to transfer amounts between two TFSAs held by the same taxpayer, without affecting the taxpayer’s TFSA contribution room. However, in order to avoid over-contribution penalties, these transfers must be made directly from TFSA #1 to TFSA #2. If you withdraw from TFSA #1 into your chequing account, and then transfer from your chequing account into TFSA #2, this transfer will be considered to be a new TFSA contribution. If you have already used up your contribution room for the year, this will then constitute an over-contribution and attract penalties.

It is also possible to transfer amounts between the TFSAs of separated/former spouses, without affecting the spouses’ TFSA contribution room. This is only permitted if the spouses are living apart, and the transfer is pursuant to a court order or a written separation agreement. As we saw earlier, this transfer must also be made directly from one TFSA to the other. If the transfer is made indirectly, via non-TFSA accounts, the spouses’ contribution room will be affected, and the transfer may attract penalty tax.

2015 TFSA Contribution Increase

The contribution room was increased to $10,000 for 2015 by the Conservative government, but this change was eliminated as of 2016 by the new Liberal parliament. However the 2015 increase to $10,000 remains in place for that year.


If you have not yet opened a TFSA, you should have available contribution room going back to 2009. The amount will be indicated on your CRA notice of assessment. . This is a great opportunity to earn interest or investment income tax-free – as long as you are careful to avoid the TFSA penalties. If you have any questions regarding compliance with the TFSA rules, feel free to contact our top Canadian income tax lawyers to arrange a consultation.