The Tax-Free Savings Account (TFSA) is an extraordinarily generous tax break, with very little planning or action required for you to benefit from its largesse.
TFSAs have now been around for over 13 years. One can easily lose track of the available contribution room, as the maximum that can be contributed has changed over the years.
Contribution room is cumulative. Once you are 18 or older in a year, you can contribute the maximum for that year, and if you do not, you can carry forward the excess room and contribute that amount in any later year.
All investment income earned in a TFSA, such as interest and dividends, as well as capital gains, is tax-free. This makes TFSAs more and more useful as the years go by.
Of course, you can withdraw any amount from the TFSA at any time, tax-free. Doing so re-creates that amount of contribution room, but only on the next January 1, not immediately.
The annual TFSA contribution limit was $5,000 when TFSAs were first introduced in 2009. It was indexed to inflation, but the amount was rounded to the nearest $500, so with low inflation it wasn’t until 2013 that the first increase to $5,500 appeared. The Conservatives increased the limit to $10,000 in 2015, and cancelled the inflation indexing. Then the Liberals, newly elected in the fall of 2015, changed the limit back to $5,500 as of 2016 but restored the indexing.
So the limit for each year is:
The total of the above amounts is $81,500.
So if you were born before 1992, and you have any investments that are not in a TFSA, you should seriously consider putting them into a TFSA until your total contributions reach $81,500.
Just be very careful about withdrawals! If you take out, say, $5,000 to spend, and you have maxed out your contribution room, wait until January 1 to put the money back. Otherwise you’ll be subject to a 1% monthly “penalty tax” on your over-contribution.
If you become non-resident, make sure to stop contributing, as severe “penalty taxes” will apply to any contributions you make while non-resident.