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Tax Free Savings Account Canada

The Canadian Government began the Tax-Free Savings Account (TFSA) program in 2009.  This program was a way for people 18 years or older to be able to put money away tax-free.  The contributions into the TFSA are not deductible for tax purposes like the RRSP, but any income earned within the account are earned tax free and any withdrawals from the account are tax free as well.

Who can open a Tax-Free Savings Account?

    • Anyone who is 18 years of age or older and has a valid Social Insurance Number can open a TFSA.  The year a person turns 18 they cannot contribute until turning 18, but at that time may contribute the maximum for that taxation year.

How can I open a Tax-Free Savings Account?

      • It’s simple to open a TFSA – just go to your bank or financial institution and tell them you would like to open a TFSA.  They will require your Social Insurance Number and date of birth for the purpose of registering your new TFSA.

Can I have more than one Tax-Free Savings Account?

      • Yes you can, you can have as many accounts as your would like, but the maximum allowed can not be exceeded between the accounts.

What types of Investments can I invest my TFSA money in?  The investments for TFSA are the same that are allowed for Registered Retirement Savings Plans (RRSP), which are:

      • Cash
      • Mutual Funds
      • Bonds
      • Guaranteed Investment Certificates (GIC’s)
      • Stocks
      • Certain Shares of Small Business Corporations

Can I transfer my RRSP over to a TFSA?

If you transfer money from your RRSP to you TFSA you will have to report the money withdrawn from the RRSP as a withdrawal.  It will be added to your income and tax will be withheld when it is withdrawn and may be claimed on line 437 of your tax return.  The tax owed on the withdrawal will depend on your income for the year, but you will most likely have to pay tax on the withdrawal.  Where as if you withdraw from your TFSA there are no tax implications.

Retirement Planning – Many Canadians have been paying into RRSP, which other than an employer pension plans have been the best tool for retirement for Canadians.  If you contribute to your RRSP on a regular basis and max it out every year then a TFSA would be a great way to save extra money for your retirement and be able to withdraw it tax-free.

Your TFSA money has already been taxed, so if you suspect your tax rate will be higher when you take the money out, you’ll have paid less tax.  This could be when you retire, you have your company pension, your RRSP, Canada Pension Plan (CPP) and Old Age Security (OAS)  if these amounts total to more than $73,756 (2016 numbers) you will have to pay back a portion of your OAS if you make over $119,400 (2016 numbers) you will have to pay back all the OAS you received.

For some people the TFSA can be better than an RRSP.  The investment does not work as a deduction on your income tax in the year of contribution but it also does not become taxable in the year of withdrawal, unlike the RRSP which, becomes taxable income in the year it is withdrawn.  The RRSP is a way to reduce your taxable income in the year you contribute and defer the tax payable until the time it is withdrawn.

Now not everyone will retire with an income of over 73,756.  Some of us will be happy to retire with half of that, take a person that has worked – low to middle class and has saved some RRSP will not get an employer pension so will be relying on these CPP and OAS at retirement, a TFSA Retirement Plan can help them as well.

When receiving OAS and a person is lower income they may be entitled to the Guaranteed Income Supplement (GIS), which is based on your annual income.  If that person were drawing money on a TFSA that income would not be included income as far as taxation, leaving this person with a better income to live on.  Here is a link to OAS and the Guaranteed Income Supplement Canadian Old Age Security

I’m not saying replace your RRSP with a TFSA, a persons personal situation will determine what is best for them, not everyone is in the same tax position so be sure to seek out a qualified financial advisor to determine what is best for you.

How much can I put into a TFSA

Regardless as to whether or not you put money into a TFSA you will accumulate contribution room in a TFSA.  That amount for 2017 would be accumulated to the sum of $52,000

These amounts accumulated since 2009 when the program began:

      • 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

You can find out how much your contribution room is by going to the Canada Revenue Site – follow this link CRA – My Account

What happens if I need to withdraw from my TFSA

When you withdraw from your TFSA it does not reduce the amount of contribution you have made in that year.  So if you withdraw $5,000 from your TFSA in Feb of 2016 and up to that date have contributed the maximum allowed.  You can not replace it in Dec 2016 because the maximum contributions have already been made.  The $5,000 will be added to the contribution room for 2017 at the beginning of 2017 at which time the $5,000 can be put back into the plan along with the $5,500 allowed for 2017.

If the amount taken out in 2016 were also replaced in 2016 then it would be subject to a tax.  That tax is 1% of the highest amount in excess of the TFSA amount for each month that it remains in your account.

A TFSA is a great way to save extra tax- free money:

      • If you are maxing out your RRSP’s.
      • If RRSP is not an option – you are over 71 and no longer able to contribute to an RRSP
      • If you are young and have lower income
      • Wanting to save for a down payment on a house, a new car, or vacation
      • Emergency Fund

The Differences between an RRSP and a TFSA


      • RRSP – The contribution limit is based on income – for 2017 that would be 18% of earned income up to a maximum of $26,010
      • TFSA – The contribution limit is $5,500 for 2017 with an accumulated total since 2009 of $52,000


      • RRSP – You can withdraw from an RRSP at anytime you wish, but the amount taken out will be taxed.  When you make that withdraw you lose that contribution room.
      • TFSA – You can withdraw from your TFSA anytime you wish and the amount is not taxed.  You lose the contribution room for that year, but it is added back in the following year.


      • RRSP– withdraws from an RRSP as subject to a withholding tax – anywhere between 5 – 30 percent depending on the amount of withdraw.  An excess of contribution of $2,000 is allowed, if there is a contribution of more than the $2,000 it will be taxed at 1% per month.
      • TFSA – if you contribute more than the limit for the year, there is a penalty of 1% per month on the over contribution.

Tax Deduction Limits

      • RRSP – the amount allowable for deduction is your contribution limit for the year.  Depending on your tax situation you may want to deduction the full amount contributed, but can opt to deduct a lesser amount and carry forward the remainder to be deducted in the next year.
      • TFSA – money contributed to a TFSA is not tax deductible.

Tax Benefits

      • RRSP – contributions to an RRSP help to reduce taxable income in the year they are used as a deduction.  The initial investment as well as earnings within the RRSP are not taxed until withdrawn from the RRSP
      • TFSA – contributions to a TFSA and any interest, dividends, capital gains earned within the plan are not taxable when withdrawn.

I believe that an RRSP is a great long-term savings and retirement plan but it may not be for everyone.  As said before every situation is different and the best thing to do is seek out information from your personal advisor on what is best for your situation.

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  1. This is a highly instructive article.

    Tax-free savings accounts seem to be an effective way of ensuring a safe retirement, especially for young people.

    I’ve been talking to my kids about the importance of investing from an early age for retirement purposes and also to be financially free.

    After your explanation, I would definitely advise my kids to open tax-free savings accounts once they turn 18.

    • TFSA is a great plan for young people who may be living at home and able to put away, but not making enough to contribute much to an RRSP.  I think it’s important also for us to teach our children to start saving at a young age.

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