Understanding TFSAs: The basics

TFSAs are a versatile way to invest

A TFSA can hold a wide range of investment vehicles. It all depends on your income, goals and tolerance for risk. For example, you can hold mutual funds, stocks, ETFs (exchange traded funds) and bonds in your TFSA. You can also hold GICs (Guaranteed Investment Certificates) and cash in a TFSA, but those may have a lower yield potential than the first four. Some investments are restricted however, so check with your financial
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TFSA tips, tricks and good-to-know info

Your current TFSA contribution room can be found by logging into the CRA My Account website. Keep in mind, though, that if you’ve contributed to your TFSA in the current tax year, that amount won’t be reflected in your total limit.  

Alternatively, you can calculate your TFSA contribution room by combining: 

• The current year’s contribution limit. 
• Unused contribution room from previous years. 
• Withdrawals from previous years 

The following is a list of annual TFSA contribution limits per year since TFSAs were created. 

For the years 2009-2012: $5,000 

For the years 2013-2014: $5,500. 

For the year 2015: $10,000. 

For the years 2016-2018: $5,500. 

For the years 2019-2022: $6,000. 

For the year 2023: $6,500. 

For the year 2024: $7,000. 

The annual TFSA contribution (dollar) limit for 2024 is $7,000. If you don’t contribute the full $7,000, this leaves unused contribution room that accumulates annually (as it does with an RRSP). This means you can contribute more than the annual TFSA dollar limit each year, as long as you didn’t contribute the maximum in past years. To see how much unused contribution room you may have go to the following CRA services: My Account; MyCRA; Represent a Client; and Tax Information Phone Services.

Money for an emergency

We’ve mentioned this before but we can’t stress it enough: the TFSA is flexible. In many cases, funds are available in next to no time, and you don't pay taxes on those withdrawals (like you would on a withdrawal from an RRSP). Withdrawn funds will also result in additional contribution room the following year.

The high-interest rate savings account vs. a TFSA

The most obvious difference between the two is that you pay taxes on any income you earn within a regular high-interest rate savings account, whereas in a TFSA you don’t. You may want to consider putting money from any taxable accounts into a TFSA as part of your overall investment strategy. Again, this might be something to discuss with your financial professional.

You can use your TFSA as loan collateral

Yes, it’s a little known fact but it’s true. You can use the assets inside your TFSA as collateral for a loan (whereas you can’t with an RRSP). This can come in handy if, for example, you have money tied up in your TFSA inside a locked-in GIC: you can’t unlock it, but you can use it as collateral.

How a TFSA affects capital gains and losses

If you earn capital gains on stocks, ETFs or mutual funds held outside a TFSA, you could be taxed on 50% of the total gain (less any capital losses) for the year. However, if you hold those investments in a TFSA, any capital gains you earn are tax-free footnote star, star^**. Capital losses, on the other hand, cannot be claimed if they occur inside a TFSA.

TFSA withdrawals don’t affect government benefits and credits

When you take money from a TFSA, it doesn’t count as income. That means you don’t pay tax on it, it doesn’t affect your GST credit or Employment Insurance, and you won’t suffer clawbacks on your Guaranteed Income Supplement or Old Age Security.

Over-contributions: Be sure to know the rules

If you withdraw money out of your TFSA, you can recontribute it, but only if you have contribution room available. If not, you will have to wait until the next calendar year. If you contribute during the same year and surpass your limit, you’ll be subject to a tax each month on the amount of the over-contribution.

Let’s look at an example. Kristina opened her TFSA in 2012 and has contributed the maximum dollar limit every year since. That gives Kristina a total of $88,000 in her TFSA account by the end of 2023. When 2022 comes, she contributes $6,000, the top dollar limit for that year. Suddenly, Kristina sees the opportunity for the trip of a lifetime, so she withdraws $3,000 to travel. Then, just as suddenly, she discovers she can’t go.

She simply can’t put that money back into her TFSA. Because she’s already maxed out her TFSA contribution for 2023, Kristina will need to wait until the beginning of 2024 to recontribute all or part of the $3,000 she withdrew (which will be added to her TFSA contribution room at the beginning of 2024). If she goes ahead and recontributes before that, she’ll have an excess amount in her TFSA. That means she’ll be charged a tax equal to one per cent of the highest excess TFSA amount for each month that excess remains in her TFSA. 

Mistakes to avoid   

Remember what we said about TFSA not being taxable? Well, that’s only if you play by the rules. For one thing, make sure you don’t exceed your contribution limit. Because over-contributions are indisputably, irrefutably taxed. In fact, you’ll be penalized at a rate of 1% of the excess amount for every month that an over-contribution sits in your TFSA account. 

Moreover, some taxpayers get confused – and then in trouble - with the rule on withdrawals. So be sure you understand how they work. To reiterate: a withdrawal will provide you with contribution room in the next year, not the current one. If you contributed your maximum $6,500 in 2023 and then withdrew $1,000, you have to wait until 2023 to get that contribution room back. If you mistakenly replaced that withdrawal in 2022, your error would be considered an over-contribution, subject to CRA penalties. 

For another, ensure your TFSA doesn’t include any prohibited investments – e.g., shares of a company in which you hold significant interest of over 10% - or non-qualified investments (which don’t have any tax benefits). If it does, you may be required to pay a tax of 50% of the value of the investment in question.  

A TFSA holder is also disallowed from carrying on a business, such as day trading, within their TFSA, with tax consequences a result of such activity. Finally, bear in mind that if you borrow money to invest in a TFSA, you are not allowed to write off the interest payments from your taxes.