Tax-free savings account

The maximum annual contribution room for each year prior to 2013 was $5,000 per year. Beginning in 2013 it was increased to $5,500 per year.[8] The $5,500 annual contribution limit was indexed to the consumer price index (CPI), in $500 increments, in order to account for inflation.[9]

The 2015 federal budget raised the contribution limit to $10,000, and eliminated indexation for inflation, beginning with the 2015 tax year.[10] However, in December 2015 a newly elected government proposed to restore the pre-2015 contribution limit of $5,500 for 2016, which will be indexed for inflation after that.[11][12][13]

As of January 1, 2023, the total cumulative contribution room for a TFSA is $88,000 for those who have been 18 years or older and residents of Canada for all eligible years.[14] Canadian residents may only begin accumulating contribution room once they have reached the age of 18. Upon turning 18, one can contribute up to the maximum allowed limit for that year. Annual contribution limits for subsequent years are accumulated in one's total contribution room.[15]

Any unused contribution room under the cap can be carried forward to subsequent years, without any upward limit.[16]

A TFSA can hold any investments that are RRSP-eligible, including publicly traded shares on eligible exchanges, eligible shares of private corporations, certain debt obligations, instalment receipts, money denominated in any currency, trust interests including mutual funds and real estate investment trusts, annuity contracts, warrants, rights and options, registered investments, royalty units, partnership units, and depository receipts.[17]

Assets within a TFSA are not protected from creditors in the event of bankruptcy or a financial judgement that results from legal proceedings against the account-holder, whereas those within an RRSP are protected. Creditor protection may only be applied to assets within a TFSA if they are held in a segregated fund with an insurance company.

A withdrawal in any year will increase the available contribution room, not in the year of withdrawal, but on January 1 of the following year. An over-contribution will occur if an individual (whose TFSA contributions have already been maximized) mistakenly believes that a withdrawal immediately creates contribution room and re-contributes the withdrawn funds later the same calendar year. At any time in the year, if an individual contributes more than their allowable TFSA contribution room, they will be considered to be over-contributing to their TFSA and will be subject to a tax equal to 1% of the highest excess TFSA amount in the month, for each month that the excess amount remains in their account.[18]

In the 2012 tax year, the CRA sent notices to about 74,000 taxpayers about TFSA over-contributions, out of about nine million TFSAs existing at the end of 2012. About 76,000 notices were sent in 2011 and 103,000 in 2010.[19]

Unlike an RRSP, a TFSA is not considered by the United States Internal Revenue Service to be a pension plan. Therefore, the tax treaty between the U.S. and Canada foregoing the U.S. withholding tax on dividends in registered pension plans does not apply to TFSA accounts, subjecting Canadians in most cases to a 15% U.S. tax withheld on dividends paid on shares of U.S. corporations. The tax withheld cannot be credited against other payable taxes as would be the case with non-registered accounts.

To get around this problem certain contracts may be offered to replicate the return of the underlying dividend-paying stocks in a fund without actually holding any of those stocks. However, due to the fees charged by the counterparty to the swap agreement, as well as the fund's own management fee, its expenses exceed the actual withholding tax payable for the underlying stocks, if those were to be held directly in the TFSA.[20][21][22][23][24][25]

Canadian mutual funds held in TFSAs are generally considered by the IRS to be investments in a passive foreign investment company (PFIC), and must be reported as such (on form 8621) by U.S. citizens. PFICs can be very disadvantageous as, absent certain elections, "excess" distributions are always taxed at the highest marginal rate. Also, income is averaged over the duration of the investment, and interest is then charged from the date the income is deemed to have occurred, resulting in effective tax rates as high as 50% or more.[26][27] A TFSA may also be a grantor foreign trust from the perspective of the U.S. U.S. citizens with a grantor foreign trust are required to file IRS Forms 3520A (due March 15) and 3520 (due at the same time as Form 1040). These forms are both complicated and both involve potentially large penalties for late filing. Like other non-U.S. accounts, a TFSA may also need to be included on a U.S. citizen's foreign bank account report (FBAR) and tax-FBAR. Earnings inside a TFSA are taxed by the U.S.