TFSA Contribution Room and Limit, Penalties, and Everything in Between for 2022

The Tax Free Savings Account (TFSA) is a gift to all Canadians. I mean, who doesn’t love tax-free money or better still, money that grows tax-free?! I know we do – especially when you count for the fairly large TFSA contribution limit/room now available (more below).

How much can you contribute to the TFSA?

How much growth can you expect from the TFSA?

Can you retire using just the TFSA?

Today’s post will share everything we know about the TFSA, answers to these questions and more, to help you save more and contribute more to your wealth building journey from this powerful account.

This is not just a savings account, the TFSA can (should) be an investment account!

Yes, let’s address the name and history of this account first.

The TFSA was first introduced in the 2008 federal budget.

It became available to Canadians for the 2009 calendar year – as of January 1, 2009.

Launched part-way through The Great Recession (where markets collapsed significantly during 2008 triggered by a financial crisis), the account was designed as a savings account (hence the name) to encourage Canadians to save more money.

But the “savings” name is very misleading. 

While you contribute and therefore save money for your TFSA with after-tax dollars, once the funds have been contributed to the account, anything you own/eligible investments inside the account can grow tax-free, for life. 

In other words, all investment income and gains, whether realized or unrealized, will never be taxed while investments are inside the account. 

We believe that TFSAs should be treated as long-term investment account. We’ll explain more details on this below, but the ability to grow money tax-free, for life, is pretty amazing stuff. 

How much can you contribute to the TFSA and what are the TFSA contribution limits? 

Each fall, under our tax rules, there is an announcement regarding how much you can contribute to the TFSA for the upcoming calendar year. The TFSA contribution room opens up every year on January 1^st.

We’ve developed this handy table for you below, and we’ll update it every year, so you can keep track of how much TFSA contribution room is opened up each tax year.

Since inception, here are the annual and cumulative TFSA contribution limits assuming *no withdrawals over that period were made:

Note: you accumulate TFSA contribution room for each year even if you do not file an income tax and benefit return or open a TFSA.

TFSA contribution limit*—2009 to 2023

The TFSA annual room limit will be indexed to inflation and rounded to the nearest $500.

*We know you noticed the asterisk above. 

*What happens if withdraw money from the TFSA? Can you add it back?

Absolutely, with caution!

Depending on the type of investment held in your TFSA, you can generally withdraw any amount from the TFSA at any time.  Withdrawing funds from your TFSA does not reduce the total amount of contributions you have already made for that year. 

After your contributions, withdrawals (excluding qualifying transfers and some specified distributions) can be made from your TFSA in the same year but that contribution room will only be added back to your account at the beginning of the following year.

Let’s look at an example:

Steve was a very keen 20-year-old back in 2009, so he opened his TFSA right away at his brokerage account. He opened a self-directed TFSA so he could hold some low-cost Exchange Traded Funds (ETFs) for long-term growth. Steve was smart, he knew early on the TFSA could be more than a savings account!

Steve diligently contributed the maximum amount to this account, every year in January, including up to 2020 as an example and never made withdrawals until summer 2020.

That means Steve contributed a total of $69,500 since the account was opened. He hasn’t contributed his 2021 TFSA contributions yet. He was unsure if he could?

Last summer, Steve took out some of the cash that had built up inside his TFSA – out. He used some of his tax-free money to pay for a used car. 

Steve took out $15,500 in July 2020.

For 2021, Cashflows & Portfolios highlighted that Steve could not only contribute his new, Canada Revenue Agency approved $6,000 to his TFSA to align with the 2021 TFSA contribution room, he could also add back the $15,500 he took out last year!

Needless to say, Steve has started to save his money diligently once again in 2021 to max out contributions to the TFSA.

Now in our example above, we wanted to share if you do take out money from your TFSA in any calendar year, that’s OK, but ensure you keep track of your withdrawals – how much you take out and when.

This will help you avoid over contributions to the account in any given year AND ensure you can contribute up to the maximum amount to the TFSA in the subsequent tax year. 

If Steve doesn’t follow these rules, he could be at risk. If he re-contributed any of the withdrawn money in the fall of 2020, before 2021 TFSA room opened up, he would have made excess contributions in 2020 – those excess contributions are charged a tax equal to 1% of the highest excess TFSA amount for each month the excess amount stays inside the account.

A good takeaway is:

If you decide to replace or re-contribute all or a part of your withdrawals into your TFSA in the same year, you can only do so if you have available TFSA contribution room/limit. 

What has worked for us at Cashflows & Portfolios?

We strive to contribute our maximum after-tax dollars to this account, every year.

We avoid withdrawals from this account as much as possible. Instead, we use the money contributed every year to buy and hold equity investments, for wealth-building purposes.

What types of investments can you own inside the TFSA?

Thankfully lots!

Similar to the assets you can hold within a Registered Retirement Savings Plan (RRSP), the TFSA can also be used to help Canadians build significant wealth beyond just holding cash savings.

With your after-tax dollars, you can own a number of different types of investments inside the TFSA:

• Cash
• Guaranteed Investment Certificates (GICs)
• Bond funds or bond ETFs
• Individual stocks
• Equity funds or equity ETFs

At Cashflows & Portfolios, we own a mix of individual, Canadian stocks and low-cost, diversified ETFs.

What types of investments do you own at Cashflows & Portfolios?

At Cashflows & Portfolios, we own a mix of individual Canadian stocks and other ETFs. 

Mark owns a few Canadian bank stocks and utility companies inside his TFSA. The same goes for his wife. He also owns low-cost Exchange Traded Fund (ETF) XAW. Joe and his spouse also own XAW for international equity exposure along with some dividend stocks and real estate investments trusts (we have posted our top holdings in the member’s Discussion Forum).

Although we have different investments inside this account, in different quantities, the results to date have been very similar – thanks to a focus on equity investments (not holding cash, or GICs, or bonds).

We have taken advantage of this account as a way to own many individual stocks or a mix of stocks via ETFs to build wealth to date – and you can consider the same. Check out our section further down for more details. 

How much growth can you expect from investments inside the TFSA?

As always in personal finance and investing – the answer is “it depends”!

We do know from our personal experiences and those from others, a focus on equity investments over the years since the TFSA contribution room has started (2009 to date) has offered the potential to deliver some solid returns and growth.

In fact, it’s not inconceivable for some couples who have maxed out their accounts since inception, and owned equities throughout this time period, to have well over $200,000 in tax-free assets!

At the end of this post, we’ll highlight some considerations for your TFSA investments although there are never any long-term guarantees. All investing choices have risk and all investment decisions are your responsibility.

To answer the question, we’ve used some simple, free, publicly available *calculators to show the tremendous power of the TFSA. *We hope to build our own for you to use over time!

Assuming:

• You keep all your TFSA contributions to date, before 2020, in cash.
• You added your $6,000 contribution for 2021.
• Assuming a solid 7% rate of return for the coming 30 years, and you likely can by investing how we have invested!

Here are the results:

Free source: https://www.getsmarteraboutmoney.ca/calculators/tfsa/

Incredible! 

And, we didn’t even add your recent contribution room for the new year yet 🙂

I mean, you can be a millionaire by just investing inside the TFSA alone!

We know, we’ve run the math!!

You can actually retire from just using your TFSA is you are wise!

Look at that chart!

Who can own a TFSA?

Thankfully the rules are somewhat simple.

• Any individual that is a resident of Canada who has a valid SIN and who is 18 years of age or older is eligible to open a TFSA.
• Any individual that is a non-resident of Canada who has a valid SIN and who is 18 years of age or older is also eligible to open a TFSA. 
• However, any TFSA contributions made while a non-resident will be subject to a 1% tax for each month the contribution stays in the account. 
• You cannot open a TFSA or contribute to one until you turn 18. However, when you turn 18, you will be able to contribute up to the full TFSA dollar limit for that year.

Example: 

Cindy turns 18 on March 15, 2022. 

Cindy will not be able to open and contribute to a TFSA until that date. 

However, after her birthday, she can open a TFSA and contribute up to the full 2022 TFSA dollar limit.

Also, we should highlight in certain provinces and territories, the legal age at which an individual can enter into a contract (which includes opening a TFSA) is 19. In this case, when the individual turns 19 and is able to enter into a contract in that jurisdiction, the TFSA contribution room for the year an individual turns 18 is carried over to the following year.

Your financial institution can help you confirm these rules. 

Are there different types of TFSAs?

Yes. 

Some TFSAs could be set up by the financial institution as mutual fund accounts – so you typically own cash, GICs, and mutual funds (and not individual stocks for example) inside this account.

Other institutions offer self-directed TFSAs. In those TFSAs, as the name implies, you can self-direct your account by owning a broader range of assets: cash, GICs, mutual funds, bonds, stocks, ETFs, and more.

What else should you know about TFSAs – before you decide where to open one?

Plenty!

Other key facts beyond what you have learned above:

1. The annual contribution limit is indexed for inflation.

TFSA contribution limits/room is indexed for inflation and annual limits vary by year. As you already know, if you don’t contribute the full amount each year, you can carry forward the unused amounts, based on the contribution limits for each year. 

Each fall, the Canada Revenue Agency (CRA) announces the indexation increase for the following TFSA calendar year. For example, the “indexation factor” for 2019 was calculated by taking the percentage change in the average monthly Consumer Price Index (CPI) data as reported by Statistics Canada for the 12-month period ended Sept. 30, 2018, relative to the average CPI for the 12-month period ended on Sept. 30, 2017.

Using that formula, CRA announced the 2019 inflation factor was 2.2 percent.

So, that rate was used to increase the federal tax brackets from the 2018 to 2019 tax years.

A similar approach will likely happen in the future. 

When considering the prior years’ inflation, that was enough to push the TFSA contribution limit for 2019 to the next $500 interval, which is why it was $6,000 for 2019.

We could anticipate that if inflation keeps rising a little bit every year, then the TFSA dollar limit in the upcoming years will bump up by another $500 increment soon, as in a few more years. 

2. You don’t need earned income to contribute.

Great! In fact, you can have your parents, spouse, partner, grandparent or other family member gift you money for your TFSA every year. Just ask them!

Kidding, but it’s worth a shot.

Again, you need to be 18 years of age or older to own an account. 

3. You don’t have to set up a TFSA or file a tax return to earn TFSA contribution room.

Unlike other accounts, such as your Registered Retirement Savings Plan (RRSP) where the account contribution room can change based on earned income, you don’t have to file a tax return to calculate your TFSA contribution room.

4. You can take money out when you want, for any reason, without paying any tax.

Yes! You already read above you can do that, with some precaution though.

That’s the great thing about this account, you can withdraw money from your TFSA tax-free!

5. Is there a deadline for TFSA contributions?

No. There is no deadline for a TFSA contribution. You just get more TFSA contribution room every year!

6. Where can I find out how much TFSA contribution room I have?

You can confirm your TFSA contribution room by contacting the Canada Revenue Agency (CRA). You can find it online if you are registered for CRA’s “My Account” services. 

For more information, see “Where can I find my TFSA contribution room information?” at canada.ca.

We also suggest you keep track of your TFSA contributions – this way, if there is an issue or a discrepancy, you can discuss it with CRA or your financial institution. 

7. What happens if I over-contribute?

Again, CRA assesses penalties for over-contributions at a rate of 1% per month on the excess contribution.

8. Do investment gains in my TFSA affect my contribution room?

Investment income and changes in the value of your TFSA investments do not affect the contribution room. This means, depending on the investment performance inside your TFSA, you have the potential to build significant wealth.

9. Are there investments that I should not hold in my TFSA?

Not really but you should know that dividend income from foreign investments (such as dividends from a U.S. stock) is generally subject to foreign withholding tax inside the TFSA. We’ll have an entire section on that below. So, from a tax perspective, it’s best to hold such foreign investments in other accounts.

10. What happens when I withdraw from my TFSA?

Again, TFSA withdrawals are tax-free, and you can use the money for any purpose. 

As you have learned above, a nice feature is that amounts you withdraw from your TFSA can be simply replaced in a future tax year. The amount you withdrew (including gains you might have) will be added to your contribution room.

So, in our example above, while Steve took out the money in 2020 he could only replace the funds in the following year because he was out of contribution room in 2020. 

You can always withdraw and replace the funds in the same year, but only if you have the available contribution room.

11. Can you have more than one TFSA?

Yes, for sure, but you don’t get more contribution room. The total you can contribute between them is limited to your accumulated contribution room. 

We suggest keeping things simple, owning one TFSA is enough!

However, if you have more than one TFSA, while you can transfer funds between them, make sure that it is an in-kind transfer between the two TFSAs only to avoid tax complications.  

Now, if you withdraw the money yourself from one TFSA and contribute that amount to another TFSA, it will be considered a separate contribution – not a transfer. That contribution will reduce, and may even exceed, your TFSA contribution room for the year. If you over-contribute you’ll pay a penalty. See above!

If you do not want to perform an account-to-account transfer, to do this properly, you can time it so that you withdraw from one TFSA near the end of the year.  Then in the new year, deposit the withdrawn amount into the new TFSA.

We encourage you to speak to your financial institution or investment firm to find out how to do this.

12. Can I open a joint TFSA with my spouse?

No, a TFSA can only be held by one person.

13. Can I make a contribution to someone else’s TFSA?

No, you can’t contribute directly to someone else’s TFSA, and that includes your spouse, partner or adult children. You can, however, gift money to them without facing any tax consequences and therefore provide another person with money so they can contribute to their own TFSA.

14. What happens if I have a capital loss in my TFSA? Can I use that to reduce my taxes?

Unfortunately not. 

In many cases, using a taxable account, some investors sell assets that decrease in value (capital loss) to lower the capital gains of other investments inside a taxable account. That’s an approach to minimize capital gains tax. 

However, you can’t carry this out using a TFSA because you don’t pay tax on any capital gains. It’s a tax-free account! This means there are no capital gains (or losses) incurred inside the account like taxable investing. 

What should you own inside a TFSA?

That depends!

Although there are many great investment choices out there, we believe holding low-cost, diversified equity ETFs are some of the best choices for many Canadians. It’s simple and easy, and the returns are great. 

We are currently in the process of creating a “model portfolio” resource page with various combinations of low-cost index ETFs. Stay tuned, we will update this article with a link when it is completed.

That said…

There may be tax implications if you allocate an outsized proportion of assets to foreign-dividend-paying stocks inside a TFSA, as this dividend income may be subject to withholding taxes by foreign governments. For example, the Internal Revenue Service (IRS) levies a withholding tax on dividends from U.S. companies held by Canadian resident investors within a TFSA, and this tax cannot be recovered.

So, it can make more sense to hold Canadian dividend paying stocks and/or Canadian-listed ETFs that own Canadian stocks inside the TFSA.

• With Canadian dividend paying stocks, there are no withholding taxes. 
• With Canadian ETFs that own Canadian stocks or bonds, there are no withholding taxes.

While it would be more tax-efficient to hold only U.S.-listed ETFs in your RRSP and keep only Canadian content like XIU, VCN and ZCN inside your TFSA it’s not worth obsessing over. 

What if I move to another country, can I contribute to my TFSA?

The good news is, if you already have a TFSA, you can maintain it.

The downside is, you cannot add funds/contribute to your TFSA after you’ve left Canada, for any tax purposes, if you have become a non-resident.

Best check with CRA and your financial institution before you leave Canada for any long-term commitment to know those rules.

When I die, will my TFSA be taxed? What happens to my TFSA?

It’s a morbid thought we know, but there are some key ways to ensure your TFSA assets get passed along without complications after you die.

If you have named your spouse or common-law partner as “successor holder” on your TFSA (you will need to fill out some paperwork at your financial institution for that), usually this person simply replaces you as the account holder and acquires all rights related to your TFSA. 

If you name your spouse as the beneficiary without the successor holder designation — or if you name any other person or the estate as the beneficiary — the TFSA earnings from your date of death to when the estate is settled could be taxable.

Here’s what you should know and consider:

As a TFSA successor holder – who can only be your spouse or partner:

• the deceased’s TFSA value is not included in their date of death/final income tax return;
• the successor holder will become the new holder of the TFSA immediately upon the deceased’s death;
• the successor holder will receive your TFSA assets, i.e. all earned income/assets up to the date of death sheltered within a TFSA account;
• all of the earned income after the date of death will remain sheltered within the TFSA (a HUGE benefit);
• after taking over ownership of the deceased’s TFSA, the successor holder can transfer all or a portion of the deceased’s TFSA account into their own existing TFSA account without impacting their TFSA contribution room; and
• after taking over ownership of the deceased’s TFSA, the successor holder can make tax-free withdrawals and make new contributions subject to their own unused TFSA contribution room limits.

TFSA beneficiary

If someone other than a spouse or common-law partner is to inherit your TFSA, that person would typically be referred to as “beneficiary.”  What you need to know in this case is:  the account must be collapsed, and the value at time of death will go to the named beneficiary.  This is how it plays out.

As a TFSA beneficiary:

• the beneficiary will receive the fair market value of the deceased’s TFSA account free of any income taxes;
• all of the income earned and increase in the TFSA assets values between the date of death and the date of the transfer to the beneficiary is taxable income and must be included in the beneficiary’s income tax return (a major drawback for spouses and common-law partners compared to the option above);
• beneficiaries can contribute a portion or all of the deceased’s TFSA assets up to the limit of their own unused TFSA contribution room; and
• if no beneficiary or successor holder is designated in the TFSA documents or in the deceased’s will, the TFSA assets will be paid to the deceased’s estate and disposed of in accordance with their will.

Now, your spouse or common-law partner can also be a beneficiary but this has some drawbacks to “successor holder”.  

As a TFSA beneficiary they can transfer the value of your plan on the date of your death (before December 31 in the year of your death) without requiring contribution room but there is paperwork involved.  In dealing with the aftermath of your death, your survivor must designate this “exempt contribution” on a CRA RC240 form (Designation of an Exempt Contribution Tax-Free Savings Account (TFSA)), and file the form with the CRA within 30 days of the contribution.  For the survivor to obtain an exempt contribution, the amount must be received and contributed to their TFSA during the rollover period.  Exempt contributions cannot exceed fair market value of the deceased’s TFSA. So, amounts earned in your TFSA after death, but before distribution to your survivor, would require TFSA contribution room for future tax sheltering – basically it’s very complicated with CRA.  Best to do any transfer as quickly as possible to reduce taxation.

Sigh. A lot we know.

So, what if you don’t name a TFSA beneficiary?

If no beneficiary is named or you name your estate as the TFSA beneficiary, then proceeds from your TFSA will be added to your estate and this will possibly increase probate fees.

For my personal situation (Mark), I made the decision to make my wife my TFSA “successor holder” for many of the positive reasons above. While naming my spouse as a TFSA beneficiary would be fine I guess, I don’t want her to go through any more hassles than necessary after I am gone.

It’s really, truly tax-free – thank you TFSA!

We covered a lot of ground and we’ll add and update this post over time to keep you informed.

While you can contribute to a TFSA with after-tax dollars, once the funds have been contributed, they can grow tax-free, for life. 

This is a huge incentive to make great use of this account as much as you can!

Here are some concluding considerations for you on that note:

1. All investors make trade-offs when it comes to their investment decisions. Stocks may or may not go up. Bond returns could be higher than stock returns sometimes. Holding cash might not keep up with inflation. There is no right or wrong answer since we cannot predict the investing future. There really is no perfect portfolio – but do consider staying invested in an approach that is aligned to your personal objectives.
2. Consider using your TFSA beyond cash savings for tax-free growth. This means most of your investments inside the TFSA should not be for speculation – but we’ll leave that decision up to you!
3. In the TFSA, we believe Canadian-listed ETFs (that invest in Canada alone or in foreign equities) are good choices since using a U.S.-listed ETF inside your TFSA does not offer any tax advantage. See our table above. That means some great options inside the TFSA are to own some Canadian-listed ETFs or maybe an All-In-One fund for simplicity. 

Unlike contributions to an RRSP, where those must end in the year you turn age 71, the TFSA is a gift of an account that keeps on giving. There is no upper age limit that prevents contributions from occurring nor is there any lifetime contribution cap at this time.

So, whether you are aged 18, 28, 58 or 88, the TFSA is an outstanding account for savings, retirement planning or anything in between.

We hope you take advantage of it like we have and intend to more with time!

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