TAX FREE SAVING ACCOUNT (TFSA)

The Tax-Free Savings Account (TFSA), introduced in 2009 under section 146.2 of the Income Tax Act, is a registered account in which investment income and capital gains accumulate free of tax and from which amounts may be withdrawn at any time without tax. Contributions are made from after-tax income and are not deductible. Withdrawals are not included in income and do not affect eligibility for income-tested federal benefits and credits such as Old Age Security, the Guaranteed Income Supplement, the Canada Child Benefit, or the Canada Groceries and Essentials Benefit.

ELIGIBILITY

• The holder must be at least 18 years of age (19 in provinces and territories where the age of majority is 19, although contribution room accrues from age 18).

• The holder must have a valid Social Insurance Number.

• The holder must be resident in Canada for contribution room to accrue. Room accrues for each calendar year in which the individual is 18 or older and resident in Canada at any time in the year.

• No earned income is required.

CONTRIBUTION ROOM

TFSA contribution room for a year equals the sum of: (a) the annual TFSA dollar limit for the year; (b) any unused contribution room from previous years; and (c) the total amount of withdrawals made in the previous year (excluding withdrawals to correct an excess contribution and qualifying transfers).

Annual TFSA dollar limits

• 2009 to 2012: $5,000 per year.

• 2013 and 2014: $5,500 per year.

• 2015: $10,000.

• 2016 to 2018: $5,500 per year.

• 2019 to 2022: $6,000 per year.

• 2023: $6,500.

• 2024 to 2026: $7,000 per year.

• Cumulative room for an individual eligible in every year since 2009: $109,000 as of January 1, 2026.

The annual limit is indexed to inflation and rounded to the nearest $500. Contribution room is available on the CRA My Account service; however, the CRA figure is updated from financial institution reporting and may not reflect transactions made in the current year.

WITHDRAWALS

• Amounts may be withdrawn at any time, for any purpose, without tax.

• A withdrawal is added back to contribution room only on January 1 of the following calendar year. Recontributing in the same year without available room creates an excess contribution.

• Transfers between TFSAs held by the same individual must be made directly between institutions to avoid being treated as a withdrawal and a new contribution.

EXCESS CONTRIBUTIONS AND PENALTY TAXES

• Excess TFSA amount: a tax of 1% per month is levied on the highest excess amount in each month for as long as the excess remains in the account.

• Non-resident contributions: a tax of 1% per month applies to contributions made while non-resident until withdrawn or the individual becomes resident.

• Non-qualified investments: a tax of 50% of the fair market value of the property at acquisition, refundable if disposed of before the end of the following year, together with tax on income earned on the investment.

• Prohibited investments (including significant interests of 10% or more in a corporation, partnership, or trust in which the holder has an interest, and non-arm's-length debt): a 50% tax, together with a 100% tax on income attributable to the prohibited investment.

• Advantage tax: 100% of the fair market value of any advantage, including benefits from deliberate over-contributions, swap transactions, and income from business carried on within the account.

• Form RC243 Tax-Free Savings Account Return, together with Schedule A (Excess TFSA Amounts) and Schedule B (Non-Resident Contributions), must be filed by June 30 of the following year where any such tax is payable.

QUALIFIED INVESTMENTS

• Cash, Guaranteed Investment Certificates, and other deposits.

• Government and corporate bonds and debentures.

• Shares listed on a designated stock exchange in Canada or abroad.

• Mutual fund units, exchange-traded funds, and segregated fund policies.

• Shares of certain small business corporations, subject to restrictions.

• Land, personal property, and shares of private corporations in which the holder has a significant interest are not qualified or are prohibited investments.

TYPES OF TFSA ARRANGEMENTS

• Deposit arrangement: held with a bank, trust company, or credit union, generally limited to deposits and GICs.

• Annuity contract: issued by a licensed annuities provider.

• Trust arrangement: a self-directed account held with a trustee, permitting a broad range of qualified investments.

ADDITIONAL RULES

• Interest on money borrowed to contribute to a TFSA is not deductible.

• A TFSA may be used as security for a loan.

• Investment losses within a TFSA are not deductible and do not restore contribution room.

• Foreign dividends are generally subject to withholding tax at source, which is not recoverable within a TFSA.

• Where the CRA determines that a TFSA is carrying on a business, such as short-term trading, the income may be taxable to the trust.

• The income attribution rules do not apply to amounts given to a spouse, common-law partner, or adult child for contribution to the recipient's own TFSA.

• On breakdown of a marriage or common-law partnership, funds may be transferred directly to the former spouse's TFSA without affecting either party's contribution room.

• Emigration: a TFSA may be retained after becoming non-resident, and income remains exempt from Canadian tax, but no new room accrues and contributions while non-resident are subject to the 1% monthly tax. The foreign jurisdiction may tax the account.

DEATH OF THE HOLDER

• Successor holder: a surviving spouse or common-law partner may be named successor holder, in which case the TFSA continues in the survivor's name without affecting the survivor's contribution room.

• Designated beneficiary: any other beneficiary receives the fair market value at death tax-free; income earned after death is taxable to the beneficiary. A surviving spouse who is a designated beneficiary may make an exempt contribution within the rollover period (generally up to December 31 of the year following death) by filing Form RC240.

• Where no designation is made, the account forms part of the estate.

PLANNING CONSIDERATIONS

• Because withdrawals are tax-free and do not affect income-tested benefits, the TFSA is particularly suitable for individuals expecting lower income in retirement and for emergency reserves.

• The relative merit of a TFSA compared with an RRSP depends on the individual's marginal tax rate at the time of contribution relative to the expected rate at withdrawal.

• Records of contributions and withdrawals should be maintained independently of CRA figures to avoid inadvertent excess contributions.