TFSA Contributions - Everything You Need To Know

By: Updated: November 17, 2021

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Tax Free Savings Accounts provide a great opportunity for Canadians to save for a variety of purposes, including purchasing a house, retirement or going on a special vacation to Hawaii. The maximum contribution room for 2021 is $6,000 per person – but your contribution room could be a lot bigger if you haven’t put in the full amount in previous years. 

 

What is Tax Free Savings Account (TFSA) contribution room?

The Canadian government generously allows you to earn interest, dividends and capital gains tax free inside your TFSA. There is no tax payable on your investments, even if you grow a $6,000 contribution into $100,000 over the years. You can take out the money without declaring it on your income tax return.

However, the government’s generosity does have limits. It restricts the amount you can contribute to your TFSA. That’s the bad news. The good news is that you can accumulate unused contribution room from previous years.

The TFSA program started in 2009. The Tax Free Savings Account limit has varied over the years (see below) but they add up. If you have not contributed ever before, you could have contribution room of $75,500!

 

How to check TFSA contribution room?

The simplest way to check your contribution room is to log into My Account on the Canada Revenue Agency website.

However, it’s a good idea to track your contributions and withdrawals because transactions from the current year may not be reflected in the My Account total. For example, let’s say your contribution room on My Account is listed as $10,000. However, you recently made a withdrawal of $1,000. This should give you another $1,000 in contribution room – but may not be reflected in My Account.

 

What is my TFSA contribution limit?

Everyone can contribute $6,000 in 2021. This makes it different from an RRSP, which has a contribution limit of 18 percent of your previous year’s taxable income.

However, everyone’s maximum contribution room for 2021 is different, depending on a number of factors:

  • Your age: You can only start accumulating contribution room when you turn 18. For example, Tony turned 18 in 2020 and hasn’t contributed any money to a TFSA. That means he has two years of room with $6,000 per year – for a total of $12,000.
  • Previous contributions: You have to deduct your previous contributions to determine your contribution room. Let’s say you started contributing when the program began in 2009 and put in a total of $10,000 over the years. You would deduct the $10,000 from the total available of $75,500 to get an available room of $65,500.
  • Previous withdrawals: If you take money out of your TFSA, this creates an equivalent amount of contribution room. For example, suppose you have $10,000 in contribution room and then make a $1,000 withdrawal. This means that you now have $11,000 in contribution room.

TFSA contribution by year: As we have indicated, the government sets the maximum annual contribution. Over the years, it has ranged from $5,000 to a high of $10,000 – and is currently set at $6,000.

 

List of TFSA contribution limits

2009 to 2012: $5,000

2013 to 2014: $5,500

2015: $10,000

2016 to 2018: $5,500

2019 to 2021: $6,000

This totals $75,500. So, if you have never contributed to a TFSA before, and reached the age of 18 in 2009 or earlier, you would have $75,500 in contribution room.

 

Does TFSA contribution room accumulate?

Yes, as we have indicated the contribution room continues to accumulate. If you don’t put money into your TFSA in 2021, you will have an extra $6,000 on contribution room.

 

When does TFSA contribution room reset?

You can begin contributing to your TFSA on January 1. Let’s say you have already maximized your contributions to your TFSA for 2021. You can start contributing again on Jan. 1, 2022. The contribution limit is expected to be $6,000 again in 2022.

 

Is there a spousal TFSA like the Spousal RRSP?

Not exactly. Only the person named on the TFSA account can make contributions, request withdrawals and make decisions about how to invest the money. Having said that, it’s perfectly fine for a spouse to give money to their partner, who can then put it in the TFSA.

Let’s look at an example. Steve is still in college and his spouse Janet recently started working as a veterinarian. Steve doesn’t have any income or any savings to put in his TFSA. However, Janet can give Steve $6,000 to contribute to his TFSA and can also invest $6,000 in her own account. In this way, they are able to contribute a total of $12,000.

 

Is there a limit to contributions to multiple TFSAs?

You can have as many TFSAs as you want. However, this may not be a good idea for three reasons:

  1. You must still stay within the $6,000 annual contribution limit. The limit is per person, not for each account.
  2. With multiple accounts, it can be more difficult to track your contributions and make sure you don’t overcontribute.
  3. Your financial institution may charge a fee on your TFSA account. So, it may not make sense to incur a lot of fees to have several accounts.

 

What happens if I overcontribute to my TFSA?

It’s important not to overcontribute because you will be hit by CRA interest charges. The tax penalty is 1 percent per month. So, if you overcontribute $1,000 you will pay a penalty of $10 per month until you address the problem by taking the money out. This is different from RRSPs, which offer a one-time overcontribution allowance of $2,000.

 

Are TFSA contributions tax deductible?

No, they aren’t tax deductible like RRSP contributions. You have to put after-tax money into your TFSA. However, the good news is that when you withdraw funds from the TFSA, you don’t have to pay tax or even report it as income on your tax return. This is different from RRSPs, where you must pay tax on any withdrawals.

 

Do dividends count as TFSA contributions?

Dividends, interest and capital gains do not count as TFSA contributions. Generally, they are not subject to tax.

 

Should I contribute the maximum to my TFSA?

You should make a financial plan to determine the best combination of RRSP and TFSA investments. This will depend on your current income, your retirement plans and your overall financial goals. However, one of the key benefits of a TFSA is that if you make a contribution and later need the funds you can easily withdraw them. There are no tax consequences or penalties.

 

Are you incorporated in Canada?

Small business owners and incorporated individuals in Canada can use a Health Spending Account (HSA) to save up to 40% of their medical expenses.  An HSA has no premiums and it is a cost effective alternative to traditional health insurance.  The plan covers a wide variety of health and dental expenses.  An HSA takes only a few minutes to set up.  Learn more by downloading one of our guides.

 

Learn more about a Health Spending Account by downloading a free guide:

Download the HSA Guide for Incorporated Individuals Download the HSA Guide for a Business with Staff

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