TFSAs: What You Need To Know

Since its inception in 2009, the Tax Free Savings Account (TFSA) has proven a useful and popular savings vehicle. However, there remains some confusion about the rules of withdrawal and reinvestment. Here is what you need to know.

The tax laws allow the holder of a TFSA to make withdrawals tax-free at any time. However, certain rules must be followed when re- contributing all or part of that amount back into the TFSA. In fact, withdrawals made in one year are added to the TFSA’s total contribution limit available in the following year.

Therefore, if you decide to reinvest all or part of your TFSA withdrawals during the same year, you can do so only if your contribution limit has not been fully utilized. Since the creation of the TFSA until today, contributions totaling $31,000 may have been made ($5,000 for the years 2009-2012 and $5,500 for 2013 and 2014).

Thus, if a taxpayer who has so far invested a total of $7,000 in his TFSA decides to withdraw this amount temporarily in March 2014, they may reinvest the funds in 2014, since they would have unused contributions of $24,000 ($31,000 – $7,000 ). However, if this person has annually contributed the maximum amount allowed and they withdraw $7,000 in March 2014, they cannot reinvest this amount in 2014 without penalty, because they will have no more unused contribution room for 2014. They will have to wait until January 1st of the following year; January 1, 2015.

Below is another example of the rules of distribution and contribution based on the Canada Revenue Agency website:

Since opening her TFSA in 2009, Sarah has contributed $5,000 for 2009, 2010, 2011 and 2013. In March 2013, Sarah makes another $5,500 contribution to her TFSA. In June 2013, she withdraws $3,000 for a trip. Unfortunately, her plans changed and she cannot go. Since Sarah already contributed the maximum to her TFSA earlier in the year, she has no TFSA contribution room left.
Sarah must therefore wait until the beginning of 2014 if she wishes to re-contribute part or all of the $3,000 she withdrew from her TFSA. The $3,000 will be added to her TFSA contribution room at the beginning of 2014.

According to this example, if Sarah makes an excess contribution in 2013, she would be subject to a monthly tax of $30 ($3,000 x 1%); this tax would be payable each month during which the over-contribution exists, which is to say, until December 2013.

Finally, it should be noted that if the maximum contribution of $31,000 were made and the TFSA generated revenues since its opening, the capital and income generated in the account may be withdrawn without tax consequences (eg. $45,000 on March 1, 2014) and re-contribute the $45,000 to her TFSA in the following year. In fact, any unused contribution room of a taxpayer for one year includes the total withdrawals by that taxpayer in the previous year. One can therefore reinvest the principal and revenues in a TFSA to take advantage of tax benefits this type of account.

It is essential to know the rules related to TFSA contributions and withdrawals. By being well informed, you can avoid a monthly penalty of 1% on excess contributions, which may negate any returns generated – tax-free – for securities held in a TFSA, which is obviously not desired.

For more information about the TFSA, visit the Canada Revenue Agency website at or consult your tax advisor.

Since the levels and bases of taxation can change, any reference in this publication to the impact of taxation should not be construed as offering tax advice; as with any transaction having potential tax implications, clients should consult with their own tax advisors.

The author

Patric Saint-Onge

Patric Saint-Onge

CPA, CA, LL.M.Fisc., TEP, Tax Specialist.
Patric Saint-Onge has been a tax specialist for over 15 years. In 2002, he co-founded the firm Corriveau Saint-Onge Inc. which specializes in Canadian taxation.

Mr. Saint-Onge has worked on major tax cases, applying complex fiscal concepts throughout his career.

He has also been a speaker on numerous occasions for both industry professionals as well as the general public. Among others, the Institute of Chartered Accountants of Quebec has requested his services as a speaker. He has also been invited as an expert in taxation on several television and radio shows, and frequently collaborates with journalists covering the economy to help with articles on various topics.