What is a Tax-Free Savings Account (TFSA)?

A Tax-Free Savings Account (TFSA) is a registered Canadian account that shelters investment growth from tax entirely. Contributions are made with after-tax money and are not deductible, but interest, dividends, and capital gains earned inside the account are never taxed, and withdrawals are not reported as income.

Despite the name, it is not limited to a savings account. A TFSA is a container that can hold cash, guaranteed investment certificates (GICs), bonds, mutual funds, exchange-traded funds (ETFs), and individual stocks. Cash may be appropriate for a short-term goal, but over a long horizon it uses valuable tax-sheltered room on an asset with a relatively low expected return.

TFSA Contribution Limit and Room for 2026

The annual TFSA dollar limit for 2026 is $7,000, unchanged from 2024 and 2025. The limit is indexed to inflation and rounded to the nearest $500, which is why it holds steady for several years and then steps up.

Unused room carries forward indefinitely. If you were at least 18 and a Canadian resident every year since the program began in 2009, and have never contributed, your cumulative room as of January 1, 2026 is $109,000.

Room starts accumulating the year you turn 18, not the year you open an account, so someone who turned 18 in 2020 has room from 2020 onward rather than from 2009. In provinces where the age of majority is 19, you cannot open the account until then, but the room for your eighteenth year still accrues and carries forward.

Your actual number depends on your own contribution and withdrawal history. The Canada Revenue Agency reports it in CRA My Account and on your notice of assessment, though the figure can lag if recent transactions have not been filed yet by your financial institution.

TFSA Withdrawal Rules

Withdrawals are tax free, unrestricted, and available for any purpose at any time. There is no minimum age, no holding period, and nothing to report as income.

Any amount you withdraw is added back to your contribution room, but not until January 1 of the following year. Withdrawing $10,000 in March and putting it back in September of the same year is an over-contribution unless you had that much unused room to begin with.

Over-contributions are taxed at 1% per month on the highest excess amount for each month it remains in the account. The penalty is small in absolute terms but easy to trigger repeatedly, particularly for people who treat the account as a chequing account and move money in and out across a single year.

TFSA vs. RRSP

Both shelter investment growth. They differ in when the tax is applied, which determines who should favour which.

The deciding variable is usually your tax rate now versus in retirement. An RRSP deduction is worth more the higher your current bracket, so high earners expecting lower retirement income generally lean RRSP. Someone in a low bracket early in their career often does better contributing to a TFSA first, then using RRSP room later when a deduction is worth more.

Two features tip the balance toward the TFSA more often than a pure tax-rate comparison suggests. Withdrawals do not count as income, so they do not claw back Old Age Security (OAS), the Guaranteed Income Supplement, or income-tested credits. And room withdrawn is not lost, which makes the TFSA usable for goals before retirement without permanently sacrificing shelter.

The right split between the two can shift over a career as income changes. You can test how the mix affects after-tax retirement income alongside Canada Pension Plan (CPP) and OAS benefits in ProjectionLab’s Canadian retirement planner.

What to Hold in a TFSA

Because growth inside a TFSA is never taxed, assets with higher expected returns get more benefit from each dollar of room. Tax treatment outside the account matters too. Interest is fully taxable outside registered accounts, while Canadian dividends and capital gains receive preferential treatment, so holding bonds in a TFSA can be sensible depending on your tax bracket, risk allocation, and the space available in your other accounts.

Dividends from US securities are generally subject to 15% US withholding tax, and unlike an RRSP, a TFSA gets no treaty exemption and cannot recover it through the foreign tax credit, since there is no Canadian tax against which to claim it. The RRSP treaty exemption generally applies to eligible US-listed securities held directly; a Canadian-listed ETF holding US stocks may still incur withholding inside the fund.

Frequent active trading inside a TFSA carries its own risk. The CRA has reassessed accounts where the pattern of activity resembled carrying on a business, taxing the gains as business income rather than treating them as sheltered.

What Happens to a TFSA at Death

Naming your spouse or common-law partner as successor holder lets them take over the account as their own, preserving the tax shelter and leaving their own contribution room untouched. This is the most advantageous designation and is available only to a spouse or common-law partner. Quebec does not recognize successor-holder designations, so a surviving spouse there uses the exempt-contribution process instead.

Naming someone as a beneficiary instead means the tax treatment depends on who receives the money and how quickly it is transferred. A non-spouse beneficiary can generally receive the account’s value at death tax free, while subsequent growth may be taxable. Starting in 2026, a surviving spouse or common-law partner who is a beneficiary may contribute an eligible survivor payment, including qualifying post-death earnings accrued during the rollover period, to their own TFSA as an exempt contribution without using contribution room. The required transfer and CRA designation deadlines still apply.

Frequently Asked Questions

What is the TFSA contribution limit for 2026? $7,000 for the year. If you have been eligible since 2009 and never contributed, your total available room is $109,000 as of January 1, 2026.

What happens if I over-contribute to my TFSA? A tax of 1% per month applies to the highest excess amount in each month the over-contribution remains. Withdraw the excess as soon as you notice it, since the charge continues until the account is back within your limit.

Can I withdraw from my TFSA at any time? Yes, for any reason, with no tax and no penalty. The only constraint is timing on putting it back: withdrawn amounts are restored to your room on January 1 of the following year, not immediately.

Is a TFSA better than an RRSP? The RRSP usually comes out ahead when your marginal rate now is higher than it will be in retirement, and the TFSA when it is lower or about the same. TFSA withdrawals also avoid clawbacks of income-tested benefits in retirement. You can also use both and shift the emphasis as your income changes.

Do I lose TFSA room if I withdraw? No. Unlike an RRSP, the room comes back. It returns at the start of the next calendar year rather than right away.

Can I hold US stocks in a TFSA? Yes, but dividends from US stocks, whether held directly or through a Canadian-listed ETF, generally face 15% US withholding tax that cannot be recovered inside a TFSA. Capital gains on those holdings are still fully sheltered.