What is a TFSA
On this page
- Save and invest tax-free
- Different types of TFSAs
- How TFSAs work
- TFSA impact on government benefits and credits
Save and invest tax-free
The Tax-free Savings Account (TFSA) is a registered savings account that functions like an investment account. It can hold cash savings and investments that generate tax-free income.
TFSAs are overseen by the Government of Canada but administered by Canadian banks and financial institutions.
Any contribution you make to your TFSA and any income you earn through interest, dividends or capital gains are generally tax-free, even when you make a withdrawal. However, unlike an RRSP, contributions you make to a TFSA are not tax deductible.
Different types of TFSAs
A TFSA can be a simple savings account or a more complex investment account.
There are 3 main types of TFSAs you can open:
- Deposit TFSA
- An account held with a bank or credit union that works like a savings account or Guaranteed Investment Certificate (GIC)
- Annuity contract
- An arrangement with an insurance company that offers guaranteed payments on a lump sum investment for a predetermined period of time
- Arrangement in trust
- An arrangement in which a financial institution holds your investments in trust for you (usually in a mutual fund account or a trading account)
Each type has its own features and risk levels. For more information about a certain type of TFSA, contact a TFSA issuer.
A TFSA may be self-directed
If you're comfortable managing your own investments, you may set up your own self-directed trust with a TFSA issuer. This type of account lets you buy and sell qualified investments such as stocks, bonds, mutual funds, and exchange-traded funds (ETFs).
Self-directed TFSAs are often used by experienced investors who want more control over their money's growth. However, TFSA holders who invest with the frequency and experience of a professional trader may have their account de-registered and any income earned taxed as a business.
How TFSAs work
When you open a TFSA, it is important to understand the basics of how to manage your contributions and withdrawals.
- You can contribute to your TFSA at any time as long as you have available contribution room in your account (otherwise you'll be taxed)
- You can withdraw funds tax-free when you want
- You can re-contribute funds to your TFSA the next calendar year or when you have enough available contribution room again
For more information: What is contribution room
TFSA impact on government benefits and credits
Any income that you earn in your TFSA will not impact your federal income-tested benefits and credits. You can also withdraw funds from your TFSA at any time, for any reason, without affecting your eligibility for federal benefits and credits.
TFSAs have no effect on the following federal benefits:
- Old Age Security (OAS)
- Guaranteed Income Supplement (GIS)
- Employment Insurance (EI)
- Canada Disability Benefit
Any income you earn or amounts you withdraw will also not affect your eligibility for the following federal credits:
- Canada Child Benefit (CCB)
- Canada Workers Benefit (CWB)
- Goods and Services Tax (GST) credit
Example: TFSA impact on OAS and CPP benefits
Denis is retired. In addition to his pension, he receives OAS and CPP benefits. He earns $500 a year in interest income from his TFSA savings.
Neither this income nor any TFSA withdrawals will affect any federal income-tested benefits or credits he receives, as they do not have to be included on his income tax and benefit return.
If he had earned $500 in a regular savings account instead, it would have to be included on his Income Tax and Benefit Return. Denis would have to pay more tax and might have to repay some of his benefits.
For information about how TFSAs may affect provincial or territorial benefits and credits, check with your province or territory.