Do Tax-Free Savings Accounts (TFSA) Makes Sense for You?

Tax-Free Savings Accounts (TFSA)

— An Accountant’s Viewpoint

Are you wondering if it makes financial sense to open a Tax-Free Savings Account (TFSA)?
What are the benefits of a TFSA?
The Canadian government introduced the TFSA in 2009 as a means for Canadians to set money aside tax-free throughout their lifetime. Any amount contributed, as well as any income earned in the account (for example, investment income and capital gains), is generally tax-free even when it is withdrawn. Since its introduction in 2009, millions of Canadians have opened a TFSA. Any individual (other than a trust) over the age of 18 possessing a valid social insurance number can open a TFSA.

Why are they effective?

When evaluating the TFSA and an RRSP, the greatest advantage of the TFSA is flexibility. With a TFSA, you can withdraw funds at anytime without impacting your ability to use the TFSA again in future. This makes it a very effective vehicle to save for the purchase of a new home, vehicle, dream vacation or a wedding.
Unlike RRSP contributions, contributions to a TFSA do not provide a tax deduction. The contributions are made with after-tax funds. As such, when you withdraw funds from a TFSA, the contributions and any income earned in the account are not taxable. Upon retirement, a TFSA can also be quite beneficial as withdrawals from the TFSA will not impact income tested benefits such as Old Age Security, or the cost of a care facility.

How much can I contribute?

The calculation of your contribution limit is based on:
1. The annual contribution limit for the year (2017 – $5,500).
2. Any withdrawals made in the previous year will be added to your current year contribution room.
3. Any unused contribution room from the previous year will be added to your current year contribution room.

The calculations can be complex if you contribute and withdraw money on a regular basis. However, Canada Revenue Agency (CRA) does track your contribution room, and makes it easy to access that information online. If you, or your accounting representative is registered for CRA’s “My Account,” you can view your annual contribution room online anytime at your convenience.
It is important to be aware of your contribution limit as there is a tax penalty for exceeding your contribution room. The TFSA over-contribution penalty is 1% per month, levied on the amount of excess TFSA contributions.

This article provides a brief overview of considerations for your yearly tax planning when using a TFSA. The calculations can be complex, and the tax consequences notable. It is always best to discuss such taxation and investment considerations with your accountant—or reach out to me at BDO—to discuss which strategy is right for you.


Contributed by: Leanne McDougall,

Senior Manager, BDO Canada LLP


This article has been carefully prepared and the information is correct as of February 22, 2018,

but it has been written in general terms and should be seen as broad guidance only.

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