What is a Tax-Free Savings Account?
Updated on April 17, 2025
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Table of Contents
What is a TFSA in Canada?
A Tax-Free Savings Account (TFSA) is a tax-advantaged account offered to Canadian residents to save and invest money without paying taxes on earned income within the account.
This is because contributing to a TFSA is not tax-deductible, but TFSA withdrawal rules on both contributions and income earned are tax-free and can be made anytime. The benefits include:
- Tax-free contribution
- Tax-free investment gains
- Tax-free withdrawals
- No age limit
Learn how a TFSA works in Canada, contribution limits for 2025, withdrawal rules, and what US citizens need to know about taxes and eligibility.
Can US citizens open a Tax-Free Savings Account in Canada?
Yes, a US citizen or a Green Card holder can open a TFSA as long as they meet the account requirements. Here’s how you can see if you’re eligible to open a TFSA:
- Residency requirement: You need to be a resident of Canada. (Non-residents can still open an account however, they will be subject to additional taxes while maintaining it.)
- Age: 18 and older
- SIN: You need to have a valid Social Insurance Number
What are the contribution limits and rules in a TFSA?
Every year, there are designated contribution limits set by the Canada Revenue Agency (CRA) termed as the TFSA contribution room. If you don’t use all your room for a certain year, it carries forward to the next so you won’t lose it.
TFSA contribution room:
|
Year |
Annual TFSA dollar limit |
|
2009 – 2012 |
CAD$5,000 |
|
2013 – 2014 |
CAD$5,500 |
|
2015 |
CAD$10,000 |
|
2016 – 2018 |
CAD$5,500 |
|
2019 – 2022 |
CAD$6,000 |
|
2023 |
CAD$6,500 |
|
2024 – 2025 |
CAD$7,000 |
If you turned 18 back in 2009, your TFSA limit will accumulate over the years, so your total contribution room this 2025 is CAD$102,000, even if you’ve never opened a TFSA. So, if you decide to open a TFSA, you can contribute up to CAD$102,000 in 2025.
If you turned 18 after 2009, your contribution room will start in the year you turned 18. So, if you turned 18 in 2016, your contribution room started in 2016 and has grown each year since. By 2025, you’d have CAD$61,000 contribution room.
It’s important to note that any earned income from the account will not add up to your contribution room for the current or future years.
Why use the IRS Streamlined Tax Amnesty Program?
It’s for American citizens that didn’t know they had to file US tax returns each year, and have therefore fallen behind. Some more than 30 years! With the IRS Streamlined Procedure, say goodbye to overdue tax returns, late fees, and penalties.
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What happens when I over-contribute to a TFSA?
If you contribute money beyond your contribution room, the CRA will charge you 1% of the excess amount per month.
To avoid this, it’s good to keep track of your contributions, especially if you hold more than one TFSA. One helpful tool is a TFSA contribution calculator that many banks and financial websites offer online.
You can also consult your bank or advisor before making a big deposit.
What are the allowable investments for a TFSA?
Here are some types of investments that can be held within a TFSA:
- Cash
- Bonds
- Mutual funds
- Securities listed on a designated stock exchange
- Guaranteed investment certificates
- Certain shares of small business corporations
How do I open a TFSA?
Opening a TFSA is a pretty straightforward process. You need to confirm your eligibility first then open you account from a bank, credit union, online brokerage, or a trust/ insurance company.
The rest of the process is customizing your investments inside a TFSA and checking if the institution has other requirements for you. Generally, you’ll need an ID and your SIN, then you can start contributing!
What are the withdrawal rules for a TFSA?
As previously stated, you can take money out of your TFSA anytime, for any reason. The amount that you take out doesn’t reduce your total contributions for the year so, you can’t re-contribute it in the same year unless you still have room.
But the withdrawn amount gets added back to your contribution room next year. For example, you withdrew CAD$500 from your TFSA last year. You can start the year with the 2025 limit + the CAD$500 withdrawal.
Transferring money from one TFSA to another doesn’t count as withdrawal. If you’re just moving money from one TFSA to another (like switching banks), it’s called a “qualifying transfer.”
How will a TFSA impact my government benefits and credits?
One of the benefits of a TFSA is that it has no impact on government benefits such as Old Age Security (OAS) benefits, the Guaranteed Income Supplement (GIS), or Employment Insurance (EI) benefits.
These benefits will not be reduced from your earned income coming from a TFSA because they are not recognized as income (tax-free.)
Additionally, a TFSA does not affect your eligibility for federal credits like the Canada Child Benefit (CCB) or the Canada Workers Benefit (CWB). There are no tax consequences for withdrawing from a TFSA.
Is TFSA tax-free for Americans?
The US-Canada tax treaty has no clear guidance on TFSAs and their tax-favored nature. This means that a TFSA is not tax-free in the US. So, as you are earning money on the interest that you will accrue on your savings, the IRS recognizes this as income which must then be taxed.
How will my TFSA impact my US tax return?
Having a TFSA as a US citizen means that you also need to report it on your federal tax return or Form 1040. Additionally, you need to file Form 8938 for Foreign Assets reporting.
For example, if you earned CAD$500 in interest through your TFSA, you would need to declare that CAD$500 (USD equivalent) on your personal tax return form before the end of the tax year.
However, some TFSAs will be held in what is known as “in trust”. This means that there is a third party on your account, also known as a trustee, who is able to make financial decisions surrounding your savings for you.
If your TFSA is considered a trust, then you will need to annually look over and file the forms 3520 and 3520-A with the IRS as well as add the interest accrued to your personal tax return form.
TFSA vs RRSP: Which one should I use?
If you’re saving money in Canada, you’ve likely heard of both the Tax-Free Savings Account (TFSA) and the Registered Retirement Savings Plan (RRSP).
An RRSP is specifically made for retirement. This is beneficial if you’re expecting to be in a lower tax bracket when you retire because your deductions will be tax deductible unlike the TFSA. However, your distribution will be taxed as ordinary income.
A TFSA is completely opposite in structure. But it’s never a bad decision to use both accounts. When it comes to saving and investing in Canada, there’s no one-size-fits-all account. Consulting with an advisor or a professional can help you decide which account might be best for your financial goals.
