Tax-Free Savings Account (TFSA) Guide for Individuals: Everything You Need to Know to Get Started

A Tax-Free Savings Account (TFSA) is a powerful financial tool for Canadians looking to grow their savings without worrying about taxes on investment income. Whether you’re new to investing or looking to maximize your contributions, this TFSA guide for individuals will help you navigate the basics, contribution rules, and tax exemptions.

 

What is a TFSA?

A Tax-Free Savings Account (TFSA) is a registered savings account that allows Canadians to earn tax-free investment income. Unlike an RRSP, contributions to a TFSA are not tax-deductible, but any interest, dividends, or capital gains earned within the account are completely tax-free, even when withdrawn.

Introduced in 2009, the TFSA is designed to help individuals save for both short- and long-term financial goals while maintaining full flexibility over withdrawals.

Who is eligible to open a TFSA?

To open a TFSA, you must be a Canadian resident with a valid Social Insurance Number (SIN), and be at least 18 years old (or the age of majority in your province). Non-residents can also open a TFSA, but any contributions made while non-resident are subject to a 1% tax per month until withdrawn.

Even if you don’t open a TFSA right away, your contribution room accumulates each year, allowing you to deposit larger amounts later without penalty.

TFSA Contribution Limits and Rules

Each year, the Canada Revenue Agency (CRA) sets an annual contribution limit for TFSAs. As of 2024, the annual limit is $7,000, but your total contribution room includes unused amounts from previous years and any withdrawals made in prior years.

To calculate your total TFSA contribution room:

  • Add up the annual limits from the years you were eligible.
  • Include any unused contribution room from previous years.
  • Add back any withdrawals from prior years.

What financial items can be held in a TFSA?

A TFSA isn’t just for cash savings. You can hold various investments, including:
 
  • mutual funds
  • securities listed on a designated stock exchange
  • guaranteed investment certificates
    bonds
  • certain shares of small business corporations

TFSA Withdrawals and Penalties

One of the biggest advantages of a TFSA is that withdrawals are tax-free and can be made at any time for any reason. However, if you withdraw funds, you must wait until the following calendar year to recontribute unless you still have available contribution room. Overcontributing results in a 1% penalty per month on the excess amount.

What is a TFSA Exempt Contribution?

When a TFSA holder passes away, their spouse or common-law partner can transfer the TFSA funds into their own TFSA without affecting their contribution room. This process, known as a TFSA exempt contribution, allows the funds to continue growing tax-free.
 
To qualify, the survivor must:
 
  • Have been the TFSA holder’s spouse or partner at the time of death.
  • Be named as a beneficiary.
  • Transfer the funds within the rollover period.
  • Ensure the transfer does not exceed the TFSA’s fair market value at the time of death.
Simplify Your Income Tax With Cross & Co.’s Tax Experts
Taxes and TFSAs don’t have to be confusing. Cross & Co.’s personal income tax experts provide tailored guidance to help you navigate the complexities of tax filing season. Learn how you can maximize your wealth today!