Tax-free savings accounts (TFSAs) were first introduced in 2009 and so have been available to Canadians for just under 20 years. Many Canadians have taken advantage of the benefits offered by such plans – in 2023, according to Statistics Canada, more Canadians contributed to a TFSA than to a registered retirement savings plan (RRSP), and the median contribution amount was higher for TFSAs than for RRSPs.
However, when those figures are compared to the number of Canadians who were actually eligible to contribute to a TFSA during 2023, the picture is not quite as positive. Based again on StatsCan figures, there were nearly 32 million Canadians who could have contributed to a TFSA during 2023, and statistics show that around 85% of those individuals did not make any TFSA contribution during the year.
The extent to which Canadians are not taking advantage of their TFSA savings opportunities could be attributable, to some degree, to unfamiliarity with the advantages that a TFSA can offer. Although TFSAs have been around for nearly 20 years they are nonetheless likely less familiar to Canadians than the better-known RRSPs. As well, when it was first introduced, the TFSA program suffered from a certain amount of “bad press”, in that the rules were not necessarily well understood (even by financial advisers), which led, in some instances, to penalties being imposed on individuals who had (in many cases inadvertently) run afoul of the rules around contributions and, especially re-contributions.
What follows is a summary of the current rules which govern TFSA plans, including who can contribute, how much can be contributed, how investment income earned and withdrawals made from a TFSA are treated for tax purposes, when and how contribution limits can be carried forward and/or withdrawn amounts re-contributed, and finally, what happens to a TFSA on the death of the planholder.
In addition, while saving through any tax-assisted savings plan is a worthwhile goal, a taxpayer’s particular circumstances can make one type of plan a better choice than another. The circumstances in which a TFSA is the better (and sometimes the only) choice for saving on a tax-assisted basis are outlined below.
The basic rules governing TFSAs are quite straightforward. Every resident of Canada who is 18 years of age or older and has a valid Social Insurance Number can open a TFSA and contribute to that plan. The amount which can be contributed each year is set by law and is the same for every Canadian, regardless of income, province of residence, or any other personal circumstances. That amount is indexed to inflation, rounded to the nearest $500. For 2026, the annual TFSA contribution limit is set at $7,000.
Amounts contributed to a TFSA are not deductible from income, but all investment income (of any type) earned by those amounts while they are in the TFSA can compound free of tax. Finally, all amounts withdrawn from a TFSA are received free of tax, whether those amounts represent original contributions made, or investment gains earned, on those contributions. The TFSA is, in many ways, the obverse of an RRSP – with an RRSP contributions made are deductible from income but all amounts withdrawn, whether original contributions or investment gains earned, are fully taxable in the year such withdrawals are made.
Where funds are withdrawn from a TFSA, the taxpayer can re-contribute the same amount, but only after January 1st of the year following the year the withdrawal was made. That re-contribution amount is additional to any current year contribution the taxpayer can make to their TFSA. For example, a taxpayer who withdrew $5,000 from their TFSA in 2025 will be able to re-contribute that amount to the TFSA in 2026, and can also contribute up to $7,000 as a current year contribution for 2026.
Finally, on the death of a TFSA planholder, the amounts within the deceased’s TFSA retain their tax-free status. While the specific rules differ, depending on the relationship (spouse/family member/non-family member) of the beneficiary to the deceased TFSA planholder, generally funds held in the TFSA are received tax-free by the beneficiary (whether named under the TFSA plan or in a will) who can then contribute such amounts to their own TFSA, within specified limits. By comparison, on the death of holders of other tax-assisted savings plans, like an RRSP or a registered retirement income fund (RRIF), all amounts in the plan (unless left to a surviving spouse) are treated as income to the planholder for the year of their death and taxed as such.
While the Canadian tax system offers a range of ways to save on a tax-assisted basis, the particular attributes of each option will drive the decision on which option is best in the taxpayer’s particular financial and tax situation. Some of the circumstances in which the TFSA is likely the best (or sometimes the only) option are as follows.
When the savings goal is short-term
Where savings are being put aside for an expenditure that is likely to be made in the next five years (like a new car, a wedding, or a “bucket list” vacation), saving through a TFSA is almost certain to be the better option. Taxpayers in that situation are sometimes tempted to make an RRSP contribution instead, in order to get a tax refund, and then to withdraw the funds when the planned expenditure is to be made. However, while choosing that option will provide a deduction on this year’s return and probably generate a tax refund, tax will still have to be paid when the funds are withdrawn from the RRSP a year or two later. And, more significantly from a long-term point of view, using an RRSP in this way will eventually erode one’s ability to save for retirement, as RRSP contributions which are withdrawn from the plan cannot be replaced – the contribution room used to make that contribution is permanently lost. While the amounts involved may seem small, the loss of compounding on even a relatively small amount over 25 or 30 years can make a significant dent in one’s ability to save for retirement.
Where both pre- and post-retirement annual income is similar
One of the greatest benefits of contributing to an RRSP is the permanent tax savings which can be realized. To do so, the taxpayer contributes to an RRSP and claims a deduction for such contributions during their peak earning years when income (and therefore the tax rate applied to that income) is higher, and then withdraws those amounts during retirement, at a time when income (and consequently the tax rate imposed) is lower, thereby realizing a permanent tax savings.
That benefit is erased where pre-retirement and post-retirement income are roughly the same, and especially when both amounts fall within the lowest federal income tax bracket. For 2026, that bracket covers income up to about $58,500. If it’s likely that annual income (and therefore tax amounts payable) will be roughly the same both before and after retirement, the income differential which enables the permanent tax savings resulting from RRSP contributions is no longer a factor, and the TFSA becomes a better vehicle for retirement savings.
There is another benefit of accumulating retirement savings within a TFSA rather than an RRSP, especially for lower and middle-income taxpayers. Our tax system provides a number of tax credits and benefits for which eligibility is determined, at least in part, by the income of the recipient taxpayer. Where funds are withdrawn from an RRSP, they are fully taxed as income and are included in income for the purpose of determining the individual’s eligibility for such tax credits and benefits. Conversely, funds withdrawn from one’s TFSA are not subject to tax and, in addition, are not included in income when determining eligibility for any federal or provincial tax credits or benefits.
When RRSP contribution room is reduced
The minority of Canadian taxpayers who belong to an employer-sponsored registered pension plan (RPP) save some percentage of income for retirement through contributions made to that RPP, with the employer also making a contribution to the benefit of the employee. The value of benefits earned under the RPP each year by the employee is known as a pension adjustment, and generally any such pension adjustment reduces the employee’s ability to contribute to an RRSP in the following year. Where the ability to contribute to an RRSP is limited in this way, a TFSA is likely the best available alternative for tax-assisted savings.
Where no RRSP contribution can be made
In some cases, the RRSP versus TFSA decision is easy – in the sense that no choice is available – and that’s the case for all Canadians who are over the age of 71
All individual Canadians must collapse their RRSPs by the end of the year in which they turn 71, and no RRSP contributions can be made after that time. Practically speaking, a TFSA is the only tax-sheltered savings vehicle to which taxpayers over age 71 can contribute, as a TFSA can be opened, or a contribution made to an existing TFSA, at any age.
Most taxpayers over the age of 71 have transferred their RRSP savings to a RRIF and are required to withdraw a specified percentage of funds from that RRIF each year. Taxpayers who are in the fortunate position of having such income in excess of current cash flow needs can contribute some or all of such amounts to a TFSA, to the extent of their TFSA contribution room for the year. While the RRIF withdrawals must still be included in income and taxed in the year of withdrawal, transferring the funds to a TFSA will allow them to continue to be invested and to compound free of tax. No additional tax will be payable when any funds in the TFSA are withdrawn and, unlike RRIF or RRSP withdrawals, monies withdrawn in the future from a TFSA will not affect the planholder’s eligibility for Old Age Security benefits or other means-tested tax credits.