TFSA in Canada

TFSA, Tax-free savings account is a form of current investment account where you can invest in financial instruments. It can be opened and used by any Canadian citizen or resident who is 18 years or above.

How does the tax treatment of TFSA, Canada work?

For example, you have 10,000 CAD worth shares in your TFSA. It earns 5% dividends in a particular year. This income returns of 500 CAD need not be added as an assessable income, when you file your tax returns. At the end of the year, you will have $10,000 plus $500 dividends, totaling to $10,500

Similarly, within your TFSA you note that your share value has increased to $10,800 from $10,000 purchase price. You decide to sell the shares at $10,800, in order to rebalance your portfolio. You will earn $800 capital gains on this sale. Your capital gain of $800 earned within your TFSA is also exempted from tax, and you are not required to include it as an assessable income when you file tax returns.

How does contributions within TFSA, Canada work?

Contribution cap is the amount of funds you can newly introduce into your TFSA in one particular financial year. It has been $6,000 since 2019 to 2022. For 2023, it is set as $6,500.

TFSA Contribution Examples

Let's learn more on TFSA with the help of examples:

** User case 1**

For example, you turned 18 years of age in the year 2019. However, you did not have sufficient funds all these years to invest in a TFSA. In 2022, you have had nearly $30,000 in hands and you would like to open and invest in a TFSA. How much can you contribute?

You can contribute and invest up to $24,000 of the available $30,000 in this financial year.

User case 2

For example, you contributed $6,000 in the previous financial year 2022, however, you withdrew $5,000 of it, for an emergency. How much can you contribute this year?

Current year contribution = $6,500+ carry over of $5,000 from previous year withdrawal.

You contribute $11,500 in this financial year 2023.

User case 3

At the beginning of the financial year 2023, you contributed $5,000. However, you withdrew $4,000 in the next month from some personal use. Can you now contribute the $4,000 in this financial year?

No, you can only contribute,

Contribution limit $6,500 – contribution made $5,000 = $1,500 in this financial year 2023. You will have $2,500 in your TFSA in this financial year.

In the next financial year 2024, you can carry forward the withdrawal of $4,000 made and contribute up to $10,500.

TFSA in Canada

Owing to the tax-treatment of TFSA, there are numerous terms and conditions attached to the account.

Now, that you know how TFSA works, you might be thinking to put some money in it. For that, it is prudent to take help of a professional financial planner or a tax expert to determine your TFSA contribution levels based on your circumstances.