Starting January 1, 2009, the Tax-Free Savings Account (TFSA) became a new option for Canadians wanting to save. Contributions are made with after-tax dollars (so contributions won’t generate a tax refund). However, income will compound tax-free and all funds may be withdrawn tax-free. This includes both contributions and investment income (such as dividends, interest or capital gains). Assets withdrawn may be put back in the following year or later without penalty.

The 2009 annual contribution limit was set at $5,000, indexed for inflation in $500 increments. Inflation adjustments increased the limit to $5,500 in 2013. In 2015, the annual limit was raised to $10,000 but was changed back to $5,500 in 2016. For 2019 the annual limit is increasing to $6,000. It may be subject to future adjustments for inflation. Adults aged 18 and over may now contribute up to their cumulative limit. Any unused room may be carried forward, and used in subsequent years.

The TFSA represents an income-splitting opportunity for families. A higher income earner may put money into a TFSA for a low or no-income partner or adult child. The account holder does not need to show any earned income to take advantage of the TFSA. It’s an ideal way for parents to help adult children acquire the funds for a first home, vacation property or private school tuition for their children.

You can name your spouse or partner as the beneficiary of your TFSA assets and, after your death, he or she can roll the funds into his or her TFSA without concern about tax (and in many jurisdictions, free from probate). If you have unused TFSA contribution room, your spouse can top up your TFSA before the rollover.

It is your responsibility to ensure that you do not exceed your total available contribution room. One way to track your available TFSA contribution room is by using the My Account service on the CRA website.

Did You Know?

TFSA withdrawals do not affect your eligibility and/or calculations for federal income-tested benefits and tax credits.

Dividends or interest from foreign investments may not be tax-sheltered in the TFSA, although the capital gains are.

How Does a TFSA Work?

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