The job opportunities and financial security that come with them are two big reasons why many immigrants choose to make Canada their home. But they should probably add the tax-free savings account to that list, too.
The Canada Revenue Authority (CRA) designed this investment vehicle to give you a flexible way to save and grow your money. Having one can relieve some of the stress of saving for a home, building an emergency fund, or just paying for your next holiday.
When it comes to sending money out of Canada—whether to fund your next trip home or make an investment abroad—Remitly makes the process easy, ensuring you can take your money with you wherever you go. To help make things easier, we’ve put together a comprehensive Canada TFSA guide.
What is a tax-free savings account?
A tax-free savings account (usually shortened to just ‘TFSA’) is a special type of investment account. Unlike a regular savings account, where you might have to pay tax on any interest or investment gains you make, a TFSA shields your earnings from taxes.
A tax-free investment can be made in cash, mutual funds, securities listed on a designated stock exchange, guaranteed investment certificates, bonds, and certain shares of small business corporations.
Canadian residents who are over the age of 18 can open a TFSA through banks, insurance companies, credit unions, and trust companies. All you need is a valid Social Insurance Number (SIN).
This type of savings account gives you the chance to:
- Grow your investment without paying additional tax. None of the interest, dividends, or capital gains earned from your TFSA are taxed.
- Withdraw funds when you need them. You can take money out at any time without penalties or tax consequences.
Let’s say you’re working towards a major financial goal, like buying a home or saving to visit your family back home. Instead of keeping your savings in a standard account, you could put them in a TFSA.
In general, TFSAs earn higher interest rates than normal savings accounts, so your money will grow faster. Plus, when you make a withdrawal, you won’t have to worry about paying tax on the amount that you get out.
Tax-free savings account vs. registered retirement savings plan
A TFSA and a Registered Retirement Savings Plan (RRSP) are both designed to help Canadians reach their savings goals, but they serve different purposes. While the TFSA encourages short- and medium-term savings, the RRSP is specifically designed for retirement savings.
One of the biggest differences between the two is how contributions and withdrawals are handled. There’s a fixed dollar amount that you can contribute to your TFSA each year, with an unused contribution allowance to carry forward to future years. With an RRSP, you can contribute up to 18% of your previous year’s income, up to a government-set maximum ($C32,490 in 2025).
Another key difference comes in when you withdraw from these investments. Unlike with a TFSA, withdrawals from your RRSP are taxed as income.
This means that taking money out of this investment while you’re still working could push you into a higher tax bracket. Plus, while withdrawing from a TFSA frees up contribution room, withdrawing from an RRSP permanently reduces this room.
Imagine you earn $C55,000 per year, paying 15% tax. You decide that you can save $C11,000 per year to move towards your financial goals and still live comfortably. You maximize your RRSP savings, contributing $C9,900 (18% of $C55,000), and you put the remaining $C1,100 into your TFSA.
Let’s say you save for two years and decide to withdraw $C20,000 to put a downpayment on a house. When you withdraw from your TFSA, you receive the full $C2,200 ($C1,100 × 2), and open up more room to make contributions in that year.
The remainder ($C17,800) has to come out of your RRSP. This increases your taxable income from $C55,000 to $C72,800 per year, and you would have to pay 20.5% tax on the portion of income ($C15,425) that’s over the $C57,375 threshold. However, the RRSP does allow you to avoid some of this tax, as your annual contributions reduce your taxable income.
As you can see, a TFSA offers greater flexibility for short- to medium-term savings, while an RRSP is better suited for long-term retirement planning. Many people use a combination of both to balance their savings strategy.
The pros and cons of using a tax-free savings account
The TFSA is a great savings tool, but it does have some limitations. Your individual financial situation will ultimately determine whether it’s the right choice for you, but understanding the advantages and drawbacks can help you figure out how it fits into your financial plan.
| TFSA benefits | TFSA drawbacks |
| Tax-free growth | Fixed dollar amount contribution limit |
| No withdrawal restrictions or penalties | Doesn’t reduce taxable income |
| Unused contribution room rolls forward | Over contribution penalties |
Understanding tax-free savings contribution limits in Canada
Each year, the Canadian government sets a contribution limit for TFSAs, which it calls your “contribution room.” For 2025, the annual TFSA contribution limit is $C7,000.
Your contribution room accumulates over time. So, if you don’t contribute the full amount you’re allowed to in a given year, the unused room carries forward. This means you have time to catch up on your savings if you have a rough year.
Your withdrawals also increase your contribution room. When you withdraw funds, the amount you take out is added back into your contribution room for the following year.
Keep in mind that the investment income earned on your TFSA—for example, interest, dividends, or other capital gains—does not affect your contribution room. Even if this increases the value of your investments significantly, your future contribution limits remain unchanged.
For ease of reference, here are the contribution limits for 2019 to 2025:
| Year/s | Contribution limit |
| 2019–2022 | $C6,000 |
| 2023 | $C6,500 |
| 2024–2025 | $C7,000 |
Imagine you immigrated to Canada in mid-2021 and decided to open a TFSA in 2023. Since you were issued a SIN in 2021, you became eligible to contribute to a TFSA. That means you would immediately be able to put $C18,500 into your TFSA ($C6,000 for 2021 + $C6,000 for 2022 + $C6,500 for 2023).
In 2024, you again contribute the full $C7,000 for a total of $C25,500. However, you run into a few financial snags, and you have to withdraw $C12,000.
When 2025 comes around, you’re allowed to contribute up to $C19,000 to your TFSA. This is because you have the full $C7,000 contribution room for that year, plus the ability to add the $C12,000 you withdrew the previous year back into the pot.
What happens if you exceed your annual contribution limits
When used correctly, a TFSA is super helpful for shielding your investments from tax. But that benefit can quickly fall away when you overcontribute.
If you exceed the annual contribution limit in a particular year—even by accident—you’ll have to pay 1% tax per month on the over-contribution amount until it’s withdrawn, or until you have more contribution room the next year.
Let’s say you made a contribution of $C6,000 at the beginning of 2024. You get a performance bonus in June and you drop an extra $C2,000 into your TFSA. You don’t realize that this pushes you over the contribution limit, and the money remains in your account until December 31,2024.
The $C1,000 in excess of the 2024 contribution limit will be taxed at 1% each month from June to December. This means that you will have to pay $C60 in taxes on your over-contribution. Fortunately, though, this will stop when your new contribution room for 2025 opens up.
Tracking your annual TFSA contribution
The tax penalty in our example above is relatively minor, but the penalties for a large over-contribution can add up quickly. This is especially risky when you’re making large payments to take advantage of unused contribution room from previous tax years.
Here’s how to effectively track your TFSA contributions to avoid overpayment:
- Check with the CRA. You can log in to your CRA My Account online or call the Tax Information Phone Service (TIPS) to see your up-to-date contribution details.
- Keep a personal record. Track every deposit and withdrawal to all of your TFSAs using a budgeting app, spreadsheet, or pen and paper.
- Set up alerts with your financial institution. Some banks allow you to set contribution alerts or view your TFSA limits online.
Tracking is particularly important if you have TFSA accounts with different financial institutions, as you need to look at all of your contributions collectively to avoid exceeding your limit.
How to withdraw money from your TFSA
You can usually withdraw money from your TFSA through your online banking portal or banking app, by visiting a bank, or by using an ATM (if your TFSA is linked to your debit card). The funds will typically be available immediately, though some financial institutions may take a day or two to process withdrawals.
You can make a withdrawal at any time. Whether you need funds for an emergency, to make a large purchase, or want to move your savings into a different investment, there are no restrictions on how much you can take out.
How to transfer your TFSA to a different financial institution
There are many reasons why you might want to move your TFSA to another bank or investment provider. You may have found better interest rates, lower fees, or investment options that better suit your goals.
Whatever the reason, it’s important to transfer your TFSA correctly to avoid unintended tax consequences.
From the CRA’s perspective, a withdrawal and a transfer are not the same. If you withdraw money and deposit it into a new TFSA yourself, it will count as a new contribution. This could potentially lead to you having to pay tax on your over-contribution.
To avoid this, you need to request a direct transfer from your financial institution. Typically, you only have to fill out a TFSA transfer form, and your bank will handle the rest.
How to maximize your tax-free savings
A TFSA is a powerful tool for growing your savings, but you need to have a strategy in place if you want to get the most out of it. Here are some best practices to follow when using a TFSA:
- Invest, don’t just save. While you can use a TFSA as a regular savings account, investing in stocks, bonds, or ETFs can help your money grow much faster.
- Contribute regularly. Setting up automatic contributions, even small ones, helps you to build your nest egg and take advantage of compound interest.
- Track your contributions. Always check your available contribution room before depositing money to avoid penalties.
- Invest local. Some foreign investments, like dividends from US stock, may still be subject to withholding taxes.
Managing your TFSA wisely helps you to maximize your savings potential while avoiding unnecessary taxes and fees.
Grow your wealth tax-free
A TFSA is a smart way to build financial security and freedom while you’re living in Canada.
It gives you the flexibility to grow your money and access it whenever you need it—be that for another move abroad or just a visit home—without the worry that your capital will be affected by tax.
Keep in mind, though, that while a TFSA offers many benefits, everybody’s financial situation is unique, and it’s best to consult a qualified financial professional before making any investment decisions.
FAQs
Who is eligible to open a TFSA in Canada?
Any person over the age of 18 who holds a valid Canadian Social Insurance Number (SIN) can open a tax-free savings account. Non-residents can also open a TFSA but will incur a 1% tax for each month a contribution is made while they’re a non-resident.
What should I consider before opening a TFSA?
Before opening a TFSA, consider how much you want to save per year and whether this lines up with the contribution limits, whether you want to save in cash or invest in securities, shares, or other financial instruments, and how long you want to hold your investment for.