What is s a TFSA (Tax-Free Savings Account)?
A Tax-Free Savings Account is type of registered tax-advantaged account that every Canadian over the age of 18 is eligible to open.
As the name suggests, using a TFSA effectively can save you thousands in taxes because the government is giving you the opportunity to earn tax-free income, including investment income.
This introductory guide answers common TFSA questions and dives into the essentials that every Canadian should know about the TFSA. By the end of this article, you will be well equipped with the knowledge required to open your own TFSA and start making tax-free income.
How much can I contribute to my TFSA?
The amount of money you can contribute to your TFSA is known as your contribution limit. Your contribution limit increases each year based on the table specified below, starting from the year you turn 18 years old. The TFSA was introduced in 2009, so if you were over the age of 18 back in 2009, then your total contribution limit would be the entire cumulative amount shown below.
Year | TFSA Contribution Limit |
---|---|
2023 | $6,500 |
2022 | $6,000 |
2021 | $6,000 |
2020 | $6,000 |
2019 | $6,000 |
2018 | $5,500 |
2017 | $5,500 |
2016 | $5,500 |
2015 | $10,000 |
2014 | $5,500 |
2013 | $5,500 |
2012 | $5,000 |
2011 | $5,000 |
2010 | $5,000 |
2009 | $5,000 |
A great feature of the TFSA is that unused contribution limit carries over every year. For example, if you were born in 1990 and have never used a TFSA before, then you would be able to contribute up to the entire cumulative contribution room of $88,000!
Keep in mind that you’re allowed to have multiple TFSA accounts, but the cumulative contribution room across all your TFSA accounts cannot exceed your contribution limit.
Your remaining contribution room is the remaining amount of money you can contribute before reaching your contribution limit. It decreases by the amount that you contribute into your TFSA. When you run out of contribution room, you have reached your contribution limit.
The Canada Revenue Agency (CRA) keeps track of your individual contribution room at the start of every year, however it is not updated until midway though the year. To view the contribution room that CRA has on your file, log into your CRA account and then scroll down to the “RRSP and TFSA” section, where you can view your contribution room as of January 1st of the current year.
It takes several months for CRA to process last year’s contributions and withdrawals. The contribution room shown will not be up-to-date if you make frequent contributions or withdrawals. Check the Transaction Summary to see the contributions and withdrawals CRA has on file.
If you want to know the value of your contribution room at all times or ensure you don’t over-contribute, it’s best to manually keep track of your contributions and withdrawals through with a spreadsheet.
How do withdrawals affect my contribution room?
One of the most notable distinctions between a TFSA and an RRSP is that when you withdraw from a TFSA, that contribution room is not lost forever. Instead, the amount that you withdrew is added back to your contribution room on January 1st of the following year.
Be wary if you’re transferring money between TFSA accounts by withdrawing cash from one account and contributing into the other. If you transfer money this way, then you won’t be able to recover the TFSA contribution room until next year.
To illustrate how withdrawals affect your contribution room, consider the following example.

The freedom of being able to withdraw money at any time without penalty is, in theory, a tremendous benefit of using a TFSA over an Registered Retirement Savings Plan (RRSP).
In reality, it can be more of a double-edged sword. A TFSA was designed to be a long-term savings vehicle, and the temptation to withdraw to access cash quickly can be detrimental to your financial goals.
Therefore, in addition to a TFSA, it may be beneficial to also have an emergency fund worth 3-6 months of expenses in a regular savings account to help prevent unplanned withdrawals from your TFSA.
Is the TFSA just used to save cash like a regular savings account?
This is a common source of confusion when it comes to the TFSA.
If you’ve never heard of a TFSA, you might guess that it functions like a regular bank savings account, except that you don’t have to pay taxes on any interest.
Unfortunately, its deceptive name does a good job concealing the true benefits of this type of account.
In fact, a TFSA is far from just a place to park your cash. To truly capitalize on the potential of a TFSA, it should be considered an investment account. Unlike your typical savings account where you simply hold cash, you can use a TFSA to buy equities like stocks and bonds.
Therefore, a TFSA is an excellent vehicle for long-term investment purposes, such as saving for retirement.
Using a TFSA this way is when you unlock its true potential: virtually 100% of your capital gains from compounding returns are tax-free.
Here is an example illustrating the difference between holding cash vs. investments over time, comparing a 1% savings interest rate to a 7% annualized average return on an investment portfolio.
At first, the difference looks pretty negligible. However, the effects of a higher annualized rate of return are astronomical over a longer time horizon.
Keep investments in your TFSA, not savings
The main benefit of a TFSA is that capital gains, dividends, and all other investment earnings within the account are completely tax-free.
In the long run, opening a TFSA instead of a non-registered investment account can amount to thousands of dollars saved in capital gains and dividend taxes.
With a non-registered account, you need to pay capital gains tax. With a TFSA, you pay zero Canadian tax on investment gains.
Withdrawals from a TFSA also are not taxed since contributions are done with after-tax income (unlike an RRSP).
Over a typical investor’s time horizon, how much can a TFSA really save in taxes?
Let’s suppose you invested $5000/year in index funds for 20 years and averaged a 7% annualized return, before withdrawing everything from your account to make a down payment for a new house.
At this point, your portfolio would be valued at an impressive $204,977.46, with $5,000 x 20 years = $100,000 of that being your contributions, and the remaining $104,977.46 being capital gains.
If your average tax rate is 30%, then you would have just saved $15,747 in taxes because you paid no capital gains tax! The same cannot be said if you tried this with a non-registered account: you would be liable to pay the capital gains tax.

This comparison really demonstrates the potential tax savings you could be missing out on if you don’t use a TFSA.
You should only use non-registered accounts after you’ve maxed out your TFSA and RRSP. Non-registered accounts have no contribution limit.
Don’t know how or where to get started investing? Check out our step-by-step guide on how to get started buying stocks in Canada.
What if my TFSA grows to $200,000? If I withdraw it all, will I gain $200,000 in TFSA Contribution Room?
The short answer: yes!
Let’s say you contributed diligently over many years or were the recipient of good stock picking fortune, and your TFSA has managed to appreciate to a value of $200,000.
You wont just be paying no Canadian taxes when making your big withdrawal.
In fact, every dollar you withdraw, whether it be your initial investment, capital gains, dividends, or interest, increases your contribution room in the following year by that same withdrawal amount, no matter how large.
That’s right – in addition to the principal, withdrawing capital gains and dividends also increases your contribution room!
On the other hand, say your stock picking caused your TFSA to plummet to $0 and you had contributed up to the limit. In that case, you have nothing to withdraw and would not be able to deposit any more money until your contribution limit increases the following year.
U.S. withholding taxes
Although you don’t have to pay any Canadian taxes on profits, it should be noted that Canadians are required to pay a 15% withholding tax on dividend earnings from a U.S. stock. This is because the tax-sheltered benefits of a TFSA are not recognized by the U.S., so you will still need to pay withholding tax if you earn U.S. dividend income. However, this is usually a relatively minor fee that is also built into most US-listed equities, so the typical investor doesn’t need to worry too much about U.S. withholding taxes.
Be careful of overcontributing
Remember that your contribution room does not increase immediately after you withdraw money from your TFSA, but rather at the beginning of the following calendar year.
If you exceed your contribution limit, then you pay a 1% fee on the excess contribution amount for every month that it remains in your TFSA.
Use your TFSA the right way
While the TFSA is great for investing purposes, it should not be used for the following reasons:
Don’t use a TFSA for…
- Day trading – Conducting very frequent trades may be considered business activity and instead of investment activity to the CRA. You may lose the tax-free benefits of the account if you’re perceived to be earning business income in your TFSA.
- As an emergency fund – Emergency funds are important to prepare you for sudden unexpected expenses. However, it would be more efficient to put your emergency fund in a traditional savings account. Only put your emergency fund in a TFSA if you have spare contribution room not being used for investments.
- Holding cash for more than the short-term – As stated earlier, there is very little tax benefit from holding cash in a TFSA. Unless you have spare contribution room, you are foregoing the potential tax savings on capital gains and dividends resulting from investing.
How can I open a TFSA?
Ready to take full advantage of the tax benefits of a TFSA and save thousands of dollars along the way?
Depending on your needs, you can open a TFSA investment account or TFSA savings account.
Create a TFSA for investing
You can always open an TFSA account with your bank, but if you’re using their investment platform, then they often come with higher trading fees for the tradeoff of convenience.
If you’re looking for the overall best TFSA investing account, I myself use and highly recommend the self-directed Questrade TFSA. Along with having one of the cheapest trading fees in Canada, you can hold CAD and USD currencies, allowing you to trade both Canadian and U.S. stocks.

Questrade TFSA
– Low costs and trading fees
– Commission-free ETF purchases
Conclusion
When used right, a TFSA is one of the most powerful tools that Canadians have at their disposal to further their financial aspirations.
I hope that this guide has equipped you with the knowledge to save thousands in taxes over your lifetime.
Now that you understand what a TFSA is, get started and open an account today!
Hi Jason,
I’m a bit confused with the definition of day trading in a TFSA account. If I buy US stocks, and sell them within 3 or 6 months and realize a capital gain; and then repeat that cycle; is that considered day trading?
Thanks,
Hassan
Hi Hassan,
There is no set definition of what constitutes as day trading in a TFSA, but CRA may investigate accounts by considering a variety of factors such as trade frequency, level of capital gains, etc.
Buying and selling stocks within 3-6 months would definitely not be considered day trading – as long as you are not making daily trades or have deemed to have business activity within your TFSA, you are fine. The scenario you list here is perfectly valid within a TFSA.
Thanks Jason!
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Hi Spencer,
I’m very glad that you had the opportunity to read over my blog and that a fellow financial enthusiast like you enjoys my articles! I really appreciate your feedback regarding the site design and the infographics. I try to make sure that every article I put out is thoroughly researched, as I truly believe that quality is more important than quantity.
Thank you for your kind comments and I look forward to posting more content!