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TFSA Basics - Understanding the Tax-Free Savings Account

Updated: Jun 3, 2021

March 2, 2021

The TFSA is a great tool for Canadian investors to grow their wealth. Here's what you need to know to get started.

Many Canadian investors debate whether to invest their savings in an RRSP or a TFSA. Which account you should use depends on several factors including the rules and limits of each plan.

What is a TFSA and how does it work?

The Tax-Free Savings Account (TFSA) is a registered savings account introduced in 2009 to help Canadians keep more of their savings by letting them accumulate investment income tax free. Think of it as a special container that can hold different investment assets to grow your savings. Whatever income is generated by the assets in this special container will never be taxed as income. Savers and investors can deposit and redeem from the plan tax free as long as they respect the contribution limits.

TFSAs are available to Canadian residents with a valid Social Insurance Number who have reached the age of majority in their province. You can have several TFSA accounts with different institutions, but your total cumulative deposits can’t go over your contribution limit for the year without penalties. You can name a spouse as your successor holder or any other beneficiary of your choosing just like most registered plans.

What are the rules for TFSAs?

One common misconception about the TFSA is that it’s a traditional cash “Savings Account” that earns interest tax free like the name suggests. In reality, you can open a TFSA with various types of financial institutions and choose the investment assets that best suit your needs for growth, income and security. Not all assets are permitted for tax shelter in the TFSA. Cash, cash equivalents, mutual funds, securities listed on a designated stock exchange, bonds and some shares in small business corporations are permitted.

Many people get confused with TFSA contribution and redemption rules and limits. Every calendar year since 2009, eligible Canadian residents have been accumulating new contribution room at the rate determined by the government of Canada. This room is cumulative regardless of whether the individual has opened a TFSA or not. How much an individual can contribute depends on their age and the amount of years they have been a Canadian resident with a valid SIN. The cumulative contribution room for 2021 is $75,500 once the $6,000 annual limit for this year is taken into consideration.

How much money are you allowed to have in a TFSA?

You can keep contributing to your TFSA accounts until you reach your cumulative overall limit, not your annual limit increase. When you withdraw money from your TFSA, you will regain contribution room equivalent to the redemption but only in the following year. This is where most people get confused. Let’s assume Ms. Smith, who had a TFSA contribution room of $75,500, contributed $50,000 in her TFSA at the beginning of 2021. A few months later, the account has grown to $60,000 and she withdraws $40,000 tax free. She can’t put all of it back in her TFSA that same year because she only has $25,500 of room left for the year. The following year, Ms. Smith will regain the $40,000 of contribution room from the redemption as well as her new annual limit determined by the government. Remember that it’s the amounts contributed and redeemed that determine how much you can put in your TFSAs, not the market value of the accounts.

As you can see, the TFSA is the most flexible of the registered accounts available in Canada. It has great benefits and can represent a significant advantage in your long-term financial success if used properly.


Marcel LeBlanc, CFP®, CIM® is a Financial Planner with Louisbourg Investments. You can find more from him on Facebook and LinkedIn. Comments or questions may be submitted to Marcel at, or he may be reached at (506) 383-5204

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This writing is for general information purposes only and is not intended to provide legal, accounting, tax or personalized financial advice. If you are not sure how to proceed with a request for further information, seek help from a professional. Any opinions expressed are my own and may not necessarily reflect those of Louisbourg Investments.


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