One of the best ways to save and invest without paying taxes on your earnings is by opening a tax-free savings account (TFSA). Whether you’re setting aside money, investing in stocks or locking in funds with a Guaranteed Investment Certificate (GIC), any income earned inside a TFSA is completely tax free. In this guide, we’ll break down everything you need to know about TFSAs, from contribution rules and eligible investments to guidelines and common mistakes to avoid.
What is a TFSA or tax-free savings account?
As the name implies, a TFSA is a savings vehicle that acts as a tax shelter for your earnings. With a TFSA, you won’t have to pay income tax on any interest earned or any capital gains from investments, even when you make a withdrawal.
Canadian residents who are 18 years of age or older with a valid Social Insurance Number (SIN) can open a TFSA by visiting a financial institution, such as a bank, credit union, trust company or insurance company.
Non-residents with a valid SIN who are 18 years of age or older can also open a TFSA, but any contributions made while a non-resident will be taxed 1% for each month the contribution stays in the account.
In provinces and territories where the age of majority is 19, you can’t open a TFSA at 18, but you will still start accumulating contribution room.
The amount of money that can be contributed to your TFSA is limited and changes each year, but any unused room is carried over to subsequent years.
The contribution limit for 2025 is $7,000. This means if you’ve been able to contribute to a TFSA since the program started in 2009, your total contribution room is now $95,000.
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Most people choose to open a TFSA savings account at a bank or credit union as it’s the safest and most flexible option. It works like a regular savings account, so you can deposit and withdraw cash whenever you want (as long as you stay within your contribution limit). The only difference is that any interest you earn will be tax-free.
Guaranteed income certificate (GIC)
Another low risk investment you can hold in your TFSA is a guaranteed income certificate. You earn interest over a period, which can range from as little as 30 days up to 10 years. You won’t pay tax on this interest if your GIC is in your TFSA, but there will be fees or restrictions if you want to withdraw your funds early.
Open an EQ Bank GIC
Lock in a 3.55% interest rate on a 1-year GIC. To fund your high interest GIC, you’ll need to open an EQ Bank Savings Plus Account first.
You can purchase bonds from government and corporate entities and earn interest when they mature at the end of the term, which can range from 1 to 30 years. Government bonds are typically considered less risky, so they often offer a lower rate.
Mutual funds
If you want to diversify your portfolio, consider purchasing a mutual fund, which allows you to pool your money with other investors to invest in a collection of assets, including bonds, ETFs and stocks. You pay a fee to the financial institution or portfolio manager managing your mutual funds, but your interest and capital gains will be tax-free in your TFSA.
Exchange traded funds (ETFs)
An exchange traded fund is a collection of stocks and/or bonds that you can trade on stock exchanges. ETFs are similar to mutual funds, but they’re typically managed by an algorithm rather than a person.
Stocks (including US stocks)
One of the highest-risk investments you can keep in your TFSA is in stocks, which can lead to a higher rate of return. Just be sure the stocks you purchase for your TFSA are listed on a designated stock exchange, or you’ll be penalized 50% of the stock’s value.
To open a tax-free savings account, follow these steps:
Decide on how you want to save or invest. You can open a TFSA and use it just like a traditional savings account, but you can also opt to invest in a GIC, ETF, stocks or bonds. Think about your financial goals and whether you need your savings to be easily accessible.
Choose a financial institution. From banks, credit unions, online trading platforms and robo-advisors, your options are endless for choosing where you want to open your TFSA. Do your homework by comparing accounts and interest rates to find the best choice to suit your needs.
Open your account. Once you’ve decided on who you’d like to bank with, get in touch to open your account. They will serve as the issuer of your TFSA. It shouldn’t take more than 20 minutes to complete if you have all the documentation ready. When you’re all set up, you can begin making contributions right away.
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How a TFSA works depends on what you’re holding in it. Some choose to hold cash like with a high-interest savings account or HISA, while others choose to hold ETFs, GICs, stocks, bonds or a mix of investments.
After you open your TFSA account with the financial provider of your choice, make an initial lump sum deposit or set up recurring deposits and contribute annually to watch your savings grow. Just make sure you stick to the general TFSA rules below on TFSA contribution limits and your overall contribution room.
You can withdraw from your TFSA at any time, and next year, you’ll have that TFSA contribution limit replenished, so you can always add more investments into your TFSA if you haven’t exceeded your maximum limit.
Does a TFSA earn interest?
If you are holding a savings product in your TFSA, such as what you’d find in a high-interest savings account or a GIC, your TFSA will earn interest determined by the interest rate offered by that account.
If you hold investments such as stocks, bonds, mutual funds or ETFs, then you won’t earn interest, but you will see capital gains as those investments grow—and you can sell these at any time if you need the funds.
What are TFSA contribution limits, and how do they work
The TFSA contribution limit is the maximum amount you can contribute to your TFSA each year.
For 2025, the CRA set a contribution limit of $7,000.
If you don’t use your full contribution limit, the unused room carries over each year.
If you withdraw from your TFSA, that amount is added back to your contribution limit the following year.
Try not to go over your contribution limit, or you’ll incur a 1% penalty per month on the highest excess amount.
Log in to your CRA My Account or call the CRA directly to check your remaining room.
TFSA over-contribution form
If you incur a TFSA over contribution penalty, you must complete a TFSA over contribution form, also known as Form RC243, Tax Free Savings Account (TFSA) return. If you incurred a penalty as a non resident, you’ll need to fill out Form RC243 Schedule B instead. When you file your annual tax return, be sure to submit this form.
How to withdraw from a TFSA
Generally speaking, you can withdraw any amount from your TFSA at any time without penalty, but how you do so depends on the financial institution. Here are some key TFSA withdrawal rules to bear in mind:
How long it will take to withdraw your cash. The ease with which you can draw money depends on the liquidity of your holdings. If you have cash holdings, you can move your savings between accounts, and withdrawals can be done immediately. However, if your money is tied up in investments like stocks, GICs, ETFs or bonds, you would need to sell the security or wait for it to reach maturity before you can withdraw the proceeds.
When you can re-contribute to your TFSA. If you want to re-contribute or replace the amount you withdrew, within the same year, you can only do so if you have TFSA contribution room available from previous years. Otherwise, you’ll have to wait until the following year when the amount you withdrew is added back to your contribution limit.
You won’t have to pay any taxes. Contributions to a TFSA are not deductible for income tax purposes.
Is there a penalty for withdrawing from a TFSA? Not at all. Any contributions and withdrawals you make, as well as any interest earned on your savings, are tax-free too, whenever you’re taking money out of a TFSA.
TFSA Pros and cons
There are TFSA advantages along with some drawbacks you’ll need to take into account.
Benefits of a TFSA
Grow your investments tax-free. The biggest benefit of a TFSA is in the title itself; the account allows you to grow your savings, earn interest on your investments and withdraw earnings without having to pay withholding fees or capital gains taxes.
Retirement planning. In addition to a registered retirement savings plan (RRSP), a TFSA can be used to pay income during retirement. This gives individuals another option when saving for retirement.
Lifelong ownership. Unlike an RRSP, a TFSA doesn’t have to be closed at a certain age.
Keep your contributions. If you don’t use all of your annual contribution limit, you can carry forward the remaining room indefinitely.
Lots of investment options. Aside from a traditional savings account, you can invest the money in your TFSA in ETFs, GICs, stocks and bonds.
Easy, tax-free withdrawals. You can withdraw any amount from your TFSA at any time without paying any penalties or taxes. But how easily you can withdraw money depends on where you’ve parked your cash.
Flexibility to fit your savings goals. Whether you’re saving up for a vacation, to buy a house or to prepare for retirement decades later, TFSAs offer flexibility because you can decide how accessible you want your savings to be.
Disadvantages of a TFSA
Small contribution limit. Savers who utilize all of their contribution room may find TFSAs limiting in terms of how much they can invest. This is especially the case after 2015 when the TFSA contribution limit was virtually cut in half. Current annual TFSA contribution limit is $6,500 for 2023.
No tax refund. Unlike with an RRSP, contributing to a TFSA doesn’t reduce taxable income, but you won’t pay tax later to access your TFSA funds.
Penalties for over-contributing. If you deposit more than the maximum TFSA contribution allotted to you, it is considered an over-contribution. Even if you’ve over-contributed by accident, a TFSA over-contribution will lead to the CRA charging you a penalty of 1% per month on your excess contribution.
Hard to track. Because you can open as many TFSAs as you’d like, it’s easy to lose track of how much you’ve contributed across the board. It’s your job to make sure you’re not exceeding your maximum contribution room when you add up all of your deposits across your accounts.
TFSA Fees
While you won’t be charged for depositing or making withdrawals into your TFSA, fees may crop up depending on where you open the account and what kinds of investments you choose. Here’s an overview of some of the fees your financial institution may charge you:
TFSA annual administration fees. While some banks won’t charge you for managing your investments, others do. Annual administration fees to the tune of about $50 can be charged for the behind-the-scenes work with record-keeping and reporting to the CRA. Some banks waive this fee if you have a minimum balance in your TFSA.
TFSA transfer out fees. The majority of Canadian banks will charge you a fee if you decide to move your TFSA account to a different bank. This charge can vary from $50 up to $150. Most banks won’t charge you if you’re moving cash between TFSA accounts within the same financial institution.
Trading/investment fees. If you’re investing your TFSA in stocks and ETFs, you may have to pay a fee to your bank or online brokerage firm. There are stock trading platforms, such as Wealthsimple and Questrade, as well as services provided by major banks, such as CIBC Investor’s Edge, TD Direct Investing and Scotiabank iTRADE, that you can use.
TFSA fees aren’t hidden in the fine print so double-check when you’re choosing which financial institution to work with for your TFSA. As always, do a TFSA fee comparison to help you decide.
TFSA taxes
As the name suggests, there are no taxes applied to a tax free savings account. When you contribute to a TFSA, your taxable income isn’t reduced and there are no tax consequences for withdrawing funds. In addition, interest, dividends and capital gains earned within a TFSA are not taxable.
The only circumstance where you may pay tax on a TFSA is if you become a non-resident of Canada by residing out of the country for the majority of the year (over 183 days). If you make a contribution to your TFSA when you’re a non-resident, you’ll be charged a 1% tax on those contributions every month.
Is there a TFSA tax return?
TFSA holders do not normally have a tax payable. For this reason, the average Canadian doesn’t have to worry about a TFSA tax return. However, a person may incur tax on their TFSA if they don’t abide by the contribution rules or make a contribution when they’re a non-resident of Canada.
If you incur TFSA taxes and believe they should be waived or cancelled, you can submit a request to the CRA. They will consider the following factors:
Tax arose from an understandable error
The transaction that caused tax gave rise to other taxation under the Income Tax Act
The extent to which payments have been made from the person’s TFSA
What is a TFSA’s interest rate?
A TFSA isn’t a traditional savings account, so there isn’t one catchall TFSA interest rate. With so many ways to invest your money, your TFSA rate of return will vary depending on which option you choose.
ETFs, mutual funds and stocks will fluctuate depending on the market and how their prices change throughout the day. While savings accounts, GICs and bonds typically come with a fixed interest rate.
TFSA vs savings account
The main difference between a TFSA vs savings account is that you won’t pay taxes on the interest earned, but you’ll have annual contribution limits to adhere to—and a TFSA can hold other types of investments in it such as GICs, ETFs, stocks or bonds.
How many of each account type of savings account do Canadians have?
After chequing and savings accounts, TFSAs are the most popular account, especially for those looking to grow their money without paying tax on the gains.
According to our latest Finder: Consumer Sentiment Survey, January 2025, 47.65% of Canadians have at least one TFSA, while 10.19% have two and 3.3% have three or more.
Another 18.98% plan to open a TFSA in 2025, to start benefiting from tax-free investment growth, flexible withdrawals and a wide range of savings and investment options.
Bottom line
TFSAs are a great opportunity for Canadians to maximize their savings with flexibility. It’s no wonder they’re so popular – your income from your TFSA is 100% tax-free, you can invest in a string of options and you can make withdrawals at any time.
Banks, online financial institutions and robo-advisors all offer TFSA products to suit a variety of needs, whether you’re looking for the perfect place to park your emergency savings while earning interest or a big return with stocks and ETFs.
You can even spread out your savings across several TFSA accounts, each set up for your different financial priorities.
Now that you’re all caught up on TFSAs, it’s time to get in on the tax-free savings. Good luck!
Tax-Free Savings Account FAQs
The main difference between a TFSA and an RRSP is the tax treatment of contributions and withdrawals. Unlike an RRSP, TFSA contributions aren't tax deductible. However, RRSP withdrawals are subject to stiff withholding taxes and count toward your income, which means they are also subject to income tax rates. TFSA withdrawals are completely tax-free.
A TFSA can function just like a savings account if you decide to use it like one and deposit your money in a high-interest savings account as a TFSA. You can also choose to invest the money in your TFSA in options, such as a GIC, ETF, stocks or bonds. A conventional savings account doesn't come with this latter option.
Yes, you can open multiple TFSA accounts—as long as you're staying within your annual TFSA contribution limit for all TFSA accounts together. For example, you can put your emergency savings fund in a high-interest TFSA account that's quick and easy to withdraw from, while having another TFSA account investing in GICs for a three year term.
No, you don't. Contributions to a TFSA aren't deductible for income tax purposes. Any amount you've contributed along with any income you've earned in your TFSA accounts are tax-free — even when you make withdrawals.
The CRA will keep track of your TFSA contribution room and will charge you a penalty fee if you exceed it.
No, you cannot open a TFSA for your child. When they turn 18, they can open one themselves. You can, however, give them funds to deposit into their TFSA once it's open.
You cannot contribute directly to your spouse's TFSA, but you can give them money to make their own contributions up to the annual TFSA maximum.
Any interest, dividends and capital gains you earn in your TFSA don't affect your contribution room.
No, there is no withholding tax for TFSAs because they're not subject to tax. However, if you over contribute to your account, you may incur a TFSA over contribution penalty tax, but this isn't withheld from your account. Instead, the CRA will invoice you for it.
Rebecca Low is a writer for Finder. She has contributed to a range of digital publications, including income.ca, Indeed, and Expatden, writing on topics like personal finance, career development, and travel. See full bio
Savings account interest is taxable in Canada. Find out how taxation works and how to minimize what you owe.
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