Tax-Free Savings Account: What a TFSA Is and How To Use It
A tax-free savings account (TFSA) is a registered account you can use to save or invest, without paying taxes on any interest, gains or dividends earned within the account.
Since the federal government introduced TFSAs in 2009, the account has been popular with investors. More than 17.7 million Canadians have TFSAs, according to the latest statistics available from the Canada Revenue Agency (CRA), which are based on 2022 contributions.
Knowing more about TFSAs can help you decide whether opening one could help you reach your financial goals and how to maximize the benefits of tax-free growth.
What is a tax-free savings account?
A tax-free savings account, or TFSA, is a government-registered account that you can use to save a certain amount of money each year without paying taxes on any earnings, such as interest. To open a TFSA, you must have a valid Social Insurance Number (SIN) and be at least 18 years old.
A TFSA is similar to other registered accounts, such as a registered retirement savings plan (RRSP). The main difference between a TFSA and an RRSP is that money you contribute to a TFSA is not tax-deductible, whereas RRSP contributions are tax-deductible. When it’s time to withdraw your funds, the opposite is true: TFSA withdrawals are tax-free, whereas you’ll pay income tax on money you receive from your RRSP.
While you can use them like a savings account, tax-free savings accounts can also do much more than simply hold cash savings.
Aside from cash savings, a TFSA can hold a variety of investments, including:
TFSA interest rates, like those of non-registered savings accounts, are variable and can change over time. The average rate for a TFSA is 2.04% at the time of this writing, according to NerdWallet analysis of interest rates offered by popular financial institutions.
Some TFSAs have interest rates as high as 4.50%, though these are often offered by digital banks or online divisions of in-person banks and credit unions.
How does a TFSA work?
A TFSA is a unique financial tool that you can use to meet your needs and future goals. Some people use a TFSA for short-term savings, such as an emergency fund or a down payment. Others use a TFSA to work toward longer-term goals like retirement savings or investing in the stock market.
TFSAs can be part of a tax-advantaged strategy that allows you to invest in a way that lines up with your goal’s timeline and potential for risk. For example, say, you’re a cautious investor saving up a down payment to buy a house in five years. In a favourable interest-rate market, you may choose a TFSA GIC to grow your savings tax-free without risking your principal.
How to check your TFSA contribution room
TFSAs have annual contribution limits. Before you start investing in a TFSA, make sure you know what your contribution limit is. For 2025, the TFSA contribution limit is $7,000.
However, the TFSA contribution room adds up over time. If you were eligible to contribute in previous years but didn’t do so, that unused room gets added to the current year’s room. This amount makes up your overall TFSA contribution room to date. As of 2025, the TFSA total contribution limit is $102,000 for people who were at least 18 years old in 2009.
If you’ve contributed or withdrawn from your TFSA in previous years, you’ll need to factor in those amounts to calculate how much you can deposit into a TFSA.
You can check your CRA My Account to see your TFSA room. But since financial institutions typically only report your contributions once a year, the contribution room amount displayed in your CRA My Account may not be accurate if you’ve made contributions or withdrawals since the start of the year.
To find out your actual contribution room for the year, you can use the following formula:
Current year contribution limit + unused contribution room from previous years + withdrawals made in previous years = current available TFSA room.
Is there a penalty for TFSA over contribution?
Excess contributions to a TFSA are taxed at 1% of the highest excess amount for each month that the excess amount stays in the account. Additionally, you’ll need to file Form RC243, Tax-Free Savings Account (TFSA) Return and pay any taxes owing by June 30 of the following year.
How TFSA withdrawals affect the contribution room
Any time you withdraw money from your TFSA, the amount you withdraw is added back to your contribution room on January 1 of the following year.
For example, say you had maxed out your TFSA in August 2024 and then withdrew $10,000 in November. On January 2, 2025, you’d be able to contribute $17,000: your $7,000 contribution for 2025 and $10,000 to make up for your withdrawal.
If you withdraw money from your TFSA, you can deposit it again within the same calendar year so long as you have available contribution room.
As for the investments you hold in your TFSA, some may have withdrawal restrictions, such as term deposits or GICs that have a maturity date. Investment losses also don’t give you more contribution room.
Note that selling investment gains in your TFSA to reinvest the available funds doesn’t count as a withdrawal that restores your contribution room.
Does a TFSA transfer count as a withdrawal?
Transferring your TFSA from one financial institution to another doesn’t count as a withdrawal as long as you ask your new financial institution to initiate the transfer. But if you simply withdraw your cash and then try to deposit it at the new financial institution, it does count as a withdrawal — and you need to make sure you don’t run into contribution limits.
Be sure to check if your bank charges transfer fees and ask if your new bank offers reimbursement.
How to open a TFSA
To open a TFSA, you should choose a financial institution, an insurance company or an investment firm that best suits your needs.
To apply for a TFSA you’ll need to:
Be a Canadian resident (non-residents pay 1% tax for each month the contribution stays in your TFSA).
Have a valid SIN.
Be at least 18 or the age of majority in your province.
You can open a TFSA and contribute the full amount of the contribution limit for the year on the day you attain majority. For example, if you turn 18 on Nov. 1, 2025, you can open a TFSA and contribute the full $7,000 annual limit on that date.
Is a TFSA worth it?
A tax-free savings account can be a good choice for those seeking registered options to maximize their tax-free earnings. Some features that make TFSAs a great addition to your investment strategy include:
Tax-free earnings. When it’s time to make a withdrawal, you don’t have to pay income tax on any earnings within the account, such as investment gains or interest.
Easy withdrawals. A tax-free savings account can be a convenient way to save for emergencies or planned purchases without paying tax on any interest earned on that cash. Plus, if you make withdrawals, you get your contribution room back in the following year.
New contribution room each year. Regardless of your income, everyone gets an additional TFSA contribution room annually. Even if they can’t use it right away, it carries forward for future contributions.
Versatility. You may appreciate having the different savings and investment options that a TFSA allows for short and long-term goals, including bonds, stocks and ETFs.
Even though a TFSA can be a right fit for many people, there are a few reasons why it may not be a good candidate for your investment portfolio, including:
No immediate tax break. If you’re looking for an upfront tax deduction, consider making contributions to an RRSP instead, which reduces your taxable income.
Contribution room must be tracked. Having multiple investments at various financial institutions may result in penalties if you accidentally over-contribute. OneA simple way to mitigate this possibility is opening only one TFSA and looking at the account’s online interface to track any contributions or withdrawals.
Day trading isn’t allowed. The CRA considers day trading to be business income, and it’s not allowed in your TFSA.
TFSA alternatives to consider
TFSAs and RRSPs are government-registered accounts designed to help you save and invest. They both offer tax benefits — but the nuance of how these benefits work is what differentiates RRSPs and TFSAs.
Another alternative is a non-registered savings account, which holds cash and earns interest without any tax advantages.
Knowing what sets these accounts apart can help you determine how to best utilize each one.
Eligibility | Canadian residents at least 18 years of age with a valid Social Insurance Number (SIN). | Anyone who is less than 71 years old, earns income and pays taxes. | Anyone with a valid Social Insurance Number (SIN). |
Contribution limit | $7,000 for 2025. | 18% of your income, up to $32,490 for 2025. | No maximum deposit limits but minimum balance requirements may apply. |
Contributions tax-deductible? | No. | Yes. | No. |
Tax-free withdrawals? | Yes. | No. | No. |
You may choose a savings account, RRSP or TFSA as the best place to stash your cash but you don’t need to select one over the other — you can have them all.
Frequently asked questions
Can the CRA see my TFSA?
Can the CRA see my TFSA?
Yes. The Canada Revenue Agency automatically receives an annual TFSA record on your behalf from the bank or credit union that issues your tax-free savings account. That’s how it calculates your contribution room each year.
Do you have to claim TFSAs on your income tax return?
Do you have to claim TFSAs on your income tax return?
No. You typically don’t need to claim anything TFSA-related on your tax return unless you over-contributed or became a non-resident of Canada.
How many TFSAs can I have?
How many TFSAs can I have?
You’re allowed to have more than one TFSA, but your total contribution room doesn’t change. It’s shared between all of your accounts. Understanding the rules is vital, as you’ll be able to use your TFSA to your advantage while avoiding any penalties.
DIVE EVEN DEEPER
Siddhi Bagwe
Sandra MacGregor
