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The Great-West Life Assurance Company, London Life Insurance Company and The Canada Life Assurance Company have become one company – The Canada Life Assurance Company. Learn more

The Great-West Life Assurance Company, London Life Insurance Company and The Canada Life Assurance Company have become one company – The Canada Life Assurance Company. Learn more

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Despite its name, it’s not a typical savings account – it’s a place where you can put investments like mutual funds or segregated funds.

It’s versatile, so you can use it to save for a more immediate goal, like saving for a new car or a trip, but you can also use it to save for your retirement. It’s partner, the RRSP, on the other hand, is just typically used for long-term investing.

  • When you’re 18 and have a valid Social Insurance Number, you can open a TFSA with help from an advisor who can set you up with investments that meet your goals.
  • You can contribute monthly but make sure to stay within the yearly limits, which is $6,000 for 2020. Your contributions aren’t deductible for income tax purposes.
  • Your investments can grow tax-free.
  • Withdraw your money tax-free when you’ve reached your goal or if something unexpected happens.
  • After you take money out, your contribution room is restored in the following year, so you can put the money back (recontribute) then with no penalties.
  • If you skip a year, or even 10, unused contribution room just rolls over to the next year.

It’s a perfect option if you: 

It’s easy to open a TFSA. There are 3 main criteria:

  • 18 or older 
  • Have a Canadian social insurance number 
  • Are a Canadian resident 

The Canada Revenue Agency (CRA) allows a specific amount of contribution room each year. Contribution room is cumulative so any room from previous years continually carries over – meaning you can continue contributing as your total contribution room grows annually. For instance:

2020 annual contribution limit - $6,000

Total cumulative contribution room available in 2020 - $69,500 (for someone who has never contributed and turned 18 before 2009)

After you withdraw money from your account, you can put the whole amount back whenever your want and still save the maximum every year.

If you go over your contribution limit within a given year, you’ll have to pay a penalty of 1% on the excess amount per month for as long as the extra amount remains in your TFSA. 

While there’s no formal deadline as contributions are not deductible, contributions and withdrawals are tracked on a calendar year basis from January 1st – December 31st. It’s important to be aware of when you’re making contributions and withdrawals because of the overcontribution penalty. Additionally, by contributing earlier in the year, your savings will have more time to grow tax-free.  

You don’t have to report your TFSA on your tax return because your contributions aren’t deductible, and any investment growth is tax-free. Your withdrawals are also tax-free. 

If you become a non-resident of Canada for income tax purposes, any contributions made at that time will be subject to a 1% tax for each month the contribution stays in the account. 

At the end of the day a TFSA and an RRSP both help you do the same thing – allow you to save money for the future. But they do it in different ways, so depending on your circumstances, having both can help you achieve your goals.

RRSP
TFSA

How do you start one?

You earned an income and filed your income taxes for the previous year
Automatically if you’re 18 or older, have a valid social insurance number and are a Canadian resident

How long can you contribute?

Dec. 31 of the year you turn 71

For life

What’s the contribution deadline?

March 1, 2021 to claim a deduction for the previous year
Not applicable as contributions aren’t deductible

What’s the contribution limit?

The smaller amount of 18% of your earned income last year or 2020’s annual limit of $27,230 plus any unused carry-forward contribution room, less any pension adjustments
$6,000 for 2020, plus any withdrawals in a previous year and any unused contribution room carried forward from the previous year

What happens if you withdraw money?

Contribution room is permanently lost

Never lose contribution room. It’s re-added on Jan. 1 of the following year

What are the upfront tax advantages?

Lower your taxable income for the current year

None because contributions are made with after-tax income

What are the future tax advantages?

Any income earned in your RRSP is usually free from tax as long as it stays in the plan.

Every dollar you withdraw is taxed at your marginal tax rate, which is usually lower when you’re retired.

You generally won’t pay tax on any income earned in the account or the money you withdraw.

There aren’t any tax consequences if you need to use your savings for emergencies or short-term expenses.

Withdrawals aren’t considered income, so this money isn’t included when the government calculates benefits like Old Age Security, Guaranteed Income Supplements, GST/HST credits and other credits/benefits like the Age Credit.

Bottom line

Can provide greater short- and long-term tax benefits but is less flexible because you have to pay income taxes on withdrawals

Doesn’t offer as many tax benefits, but is much more flexible because there are no tax consequences for withdrawals

The information provided is based on current laws, regulations and other rules applicable to Canadian residents. It is accurate to the best of our knowledge as of the date of publication. Rules and their interpretation may change, affecting the accuracy of the information. The information provided is general in nature, and should not be relied upon as a substitute for advice in any specific situation. For specific situations, advice should be obtained from the appropriate legal, accounting, tax or other professional advisors. 

Canada Life has been paying claims for 150 years. Work with one of our trusted advisors to help build a plan for you.