Tax Free Savings Account (TFSA)

by Jeffery A. Keill, CFP, CIM, FMA, FCSI, CEA, Portfolio Manager, Senior Wealth Advisor Keill & Associates- Advisory Team

There are a few no-brainers in Canadian personal finance. The Tax-Free Savings Account (TFSA) is one of them. It is a versatile and advantageous financial tool available to Canadian residents. Introduced by the Government of Canada in 2009. The TFSA was designed to encourage savings and investment by offering  a unique combination of flexibility and tax benefits. TFSAs have become a staple for many Advisors and their clients. This powerful account helps millions of Canadians achieve a wide range of goals including a home purchase, education savings, and retirement savings, while offering some tax sheltering along the way. Let’s explore the history, structure, and what our Advisory Team believes are the advantages, limitations, and strategic uses of TFSAs.

A little Background of the TFSA

Before inception of the TFSA, the Registered Retirement Savings Plan (RRSP) was the primary tax- advantaged account used by Canadians. While RRSPs offered immediate tax deductions and tax-deferred growth, withdrawals were taxed as income.

The  purpose of the TFSA was to create an account that could be used for a wide variety of savings objectives without the constraints or tax penalties associated with other registered accounts. This flexibility, coupled with the ability to earn and withdraw investment income tax-free, has made the TFSA a no brainer for many.

Structure and Mechanics of the TFSA

Eligibility and Conditions

The TFSA is open to any Canadian resident aged 18 or older with a valid Social Insurance Number (SIN). Contributions are limited and set by the federal government. Since the program began, the annual contribution limit has changed multiple times, ranging from $5,000 to $10,000 depending on the government policy. Currently (2025) the contribution limit is $7,000 per year with a lifetime limit maximum of $102,000. Unused contribution room can be carried forward indefinitely, allowing savers to maximize their accounts even if they miss contributing in a particular year.

Investment Options

It is important to remember that a TFSA is not an investment itself. It does not have a rate of return, but rather the investments held in the TFSA provides the benefit. Think of the TFSA as a bowl. The nutritional food value and flavour does not come from the bowl but rather which food the person selects from the bowl. A Tax-Free Savings Account is just an account- a bowl in which we place investments as compared fruits, cereal, or soup. The TFSA is a registered, tax-sheltered account in which individuals can hold a variety of investments, including:

• Cash Deposits

• Stocks

• Bonds

• Mutual funds

• Exchange-Traded Funds (ETFs)

• Guaranteed Investment Certificates (GICs)

Advantages of the TFSA

Tax Benefits

The defining and extraordinary feature of the TFSA is that all income- including interest, dividends, and capital gains-earned within the account is completely tax-free, even when withdrawn. Unlike the RRSP, contributions are not tax-deductible; however withdrawals do not count as taxable income or affect government benefits such as Old Age Security, Guaranteed Income Supplement, Canada Child Benefit, or other income tested credits.

Flexibility of Withdrawals

One of the most attractive aspects of the TFSA is withdrawal flexibility. Funds can be accessed at any time, for any reason, with no penalty and no tax consequence. Additionally, any amount withdrawn from the account is added back to your contribution room the following year, allowing for continued growth and long-term savings by replacing the withdrawn funds.

Estate Planning

TFSAs offer advantages in estate planning, as account holders can name a successor holder or beneficiary. Upon death, the account assets can pass tax-free to the designated individual, simplifying the transfer of wealth.

No Age Limit on Contributions

Unlike RRSPs, which must be converted to a Registered Retirement Income Fund (RRIF) or annuity by the end of the year in which the account holder turns 71, TFSAs come with no upper age restrictions or maturity. Contributions can continue for as long as the individual is alive and remains a Canadian resident.

Limitations and Considerations

Record-Keeping, Complexity, and Contribution Limits

Because the TFSA is so versatile, individuals may find it challenging to track withdrawals, contributions, and available room- especially when holding multiple accounts at different financial institutions. Careful record- keeping is essential to avoid penalties, and our Team highly recommends only having one TFSA account and working with an Advisor to ensure you keep within limits. Due to administrative and communicative shortcoming with the Canadian Revenue Agency (CRA) and financial institutions, keeping track of your limit yourself is essential. Over-contributions come with hefty penalty. Over-contributing to a TFSA results in a penalty tax of 1% per month on the excess amount until it is withdrawn or offset by future contribution room.

Another area to be aware of is the use of a TFSA and frequent trading strategies. Excessive returns from high trading frequency can trigger the anti-avoidance rules with CRA and cause some income to become taxable.

K&A Strategic Uses of the TFSA

Short-Term and Long-Term Savings

The TFSA is ideal for both short-term and long-term savings goals. Young adults can use it  as an emergency fund or supplement a down payment for home purchases. For retirees, it offers a tax free income stream that does not interfere with government benefits.

Investment Growth and Wealth Building

Given the tax-free nature of all investment growth inside the TFSA, there is potential for faster wealth accumulation. Canadians maximizing their contribution room and invest in growth assets can generate substantial returns over many years, free from the drag of taxes.

Supplementing Retirement Income

Because TFSA withdrawals don’t affect taxable income, they are a popular tool for retirees seeking to supplement pension income or government benefits without OAS claw backs or additional taxes.

Income Splitting for Couples

As TFSAs are individual accounts, couple  can maximize savings by each opening and funding their own TFSA. This doubles the available contribution room and can result in greater tax-free growth.

Conclusion

The Tax-Free Saving Account is a powerful and flexible tool for Canadians seeking to save and invest for the future. Its unique combination of tax-free growth, flexible withdrawals, and broad investment options make it indispensable in modern financial planning. By understanding the contribution rules, tax implications, and strategic uses of the TFSA, individuals can optimize their savings and achieve a wide range of personal and financial goals.

Disclaimer and Notice to Reader:  This Discussion Paper should not be construed as legal or tax advice but rather only as a general statement and explanation of the topic matter.   Professional tax and legal advice should be obtained for the readers own personal situation.  For more information on this topic or how it applies to your family, please contact our Wealth Advisory team. 

Last edit August 18, 2025