A Tax-Free Savings Account (TFSA) is one of the most popular account types for investors due to both its flexibility and tax free savings opportunity. It is the only tax-sheltered account that allows you to withdraw and contribute without penalty.
Unlike other registered accounts, you do not get a tax deduction when contributing to your TFSA. However, the benefit is that any income or capital gains earned in the account are completely tax free, even when you withdraw them.
The “tax-free” nature of the TFSA also means you are unlikely to have any tax filing to do for it at the end of the year, which means one less account to worry about.
TFSA contribution room
Your TFSA contribution room is how much you can put in your account at any given time. This contribution room started growing the year you turned 18 or whenever you became a Canadian resident (if applicable).
Since 2009 (the inception of the TFSA), the Canadian government has determined each year how much money will be added to your contribution room. Depending on the year, this amount was as little as $5,000 and as great as $10,000. You do not need to have opened a TFSA that year to qualify for the added contribution room, you simply have to be over the age of 18.
Below is a helpful chart to determine how much was granted each year and how much your starting contribution room would be depending on which year you turned 18:
| Year | Amount granted | Total room |
|---|---|---|
| 2009 | $5,000 | $109,000 |
| 2010 | $5,000 | $104,000 |
| 2011 | $5,000 | $99,000 |
| 2012 | $5,000 | $94,000 |
| 2013 | $5,500 | $89,000 |
| 2014 | $5,500 | $83,500 |
| 2015 | $10,000 | $78,000 |
| 2016 | $5,500 | $68,000 |
| 2017 | $5,500 | $62,500 |
| 2018 | $5,500 | $57,000 |
| 2019 | $6,000 | $51,500 |
| 2020 | $6,000 | $45,500 |
| 2021 | $6,000 | $39,500 |
| 2022 | $6,000 | $33,500 |
| 2023 | $6,500 | $27,500 |
| 2024 | $7,000 | $21,000 |
| 2025 | $7,000 | $14,000 |
| 2026 | $7,000 | $7,000 |
Multiple TFSAs, same contribution room
There are no restrictions on how many TFSA accounts you can have. In the event you do open more than one TFSA account, they will all share the same contribution room and limitations – so whether you have one, five, or ten TFSAs, your annual contribution room stays the same.
It can be difficult to keep track of your TFSA contribution room when you have multiple accounts. While the CRA does keep track of it, they can be delayed in posting accurate information. As such, the best and most reliable strategy for keeping track of both your contributions and withdrawals is to do so by yourself.
Withdrawing from a TFSA
One of the greatest benefits of a TFSA is that you can withdraw your funds at any point. Not only will this amount not be taxed, it will also be added back to your contribution room on January 1 of the following year. This includes your entire withdrawal; so even if you generate a large profit and withdraw it, you will be able to re-contribute it on the next January 1st.
Of course, if you already have enough TFSA contribution room, you do not need to wait until January 1st to make a new contribution. If your contribution room is empty, rest assured that on January 1 you will have all of your withdrawal amounts re-added, in addition to the new annual TFSA amount determined by the government.
Can you day trade in a TFSA?
Stories have emerged of day-traders getting penalized in their TFSA for using it to actively trade like a business. As a result, the CRA has decided to tax those traders’ TFSA earnings as though through a business account.
The solution to avoiding this taxation seems simple: determine how many trades are too many, and stay below that number. The problem is the CRA does not make it clear how much trading is too much, so investors are left to wonder if their TFSA may get penalized.
We do know that the CRA has targeted these individuals based on how many trades they place, their individual knowledge of the securities market, the amount of time dedicated to research and trading, and most importantly, how much money they have earned.
If you want to avoid risking your TFSA being taxed, avoid high frequency trading, and invest in companies that you intend to hold for a long time. In the end, if you end up getting taxed on your TFSA earnings, it generally means you’ve made a lot of money, so you might not be as concerned with the result.
Summary
The TFSA is the most popular Canadian investment account that allows owners the ability to grow their money tax free while giving them the flexibility to withdraw as well as re-contribute after a certain amount of time. Individual contribution room starts accumulating annually when someone turns 18 in Canada (or becomes a permanent resident) with the CRA keeping track of total TFSA contribution room.
