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TFSAs offer a simple way to help grow your investments free of the application of Canadian income tax. If you want to work toward your financial goals, you should be aware of the potential benefits of TFSAs.
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What is a Tax-Free Savings Account (TFSA) and how does it work?
TFSAs are investment plans registered with the federal government that offer potential tax benefits. Generally, the growth earned on investments within the TFSA, whether in the form of capital gains, interest or Canadian dividends, is not taxed in Canada and amounts can be withdrawn without being included in your income for tax purposes. However, unlike a Registered Retirement Savings Plan (RRSP), you cannot deduct your TFSA contributions from your taxable income. Generally, amounts withdrawn from your TFSA will be added to your TFSA contribution room in the following year. TFSAs are available to Canadian residents who have reached the age of majority in their province, either 18 or 191.
How does a TFSA work?
TFSAs aren't simple savings accounts. You can unlock real value once you start thinking of them as investment vehicles. In managing your TFSA, you also need to consider your risk appetite as well as whether your goals are long-term or short-term.
The Income Tax Act states that you may only hold qualified investments in your TFSA; these can include mutual funds, publicly listed stocks, government bonds, certain corporate bonds, Exchange-Traded Funds (ETFs), Guaranteed Investment Certificates (GICs), cash and even certain options
The types of investments you can purchase in your TFSA may be impacted by the TFSA issuer i.e., the financial institution you are opening the account with.
TFSA Contribution Limit
The TFSA contribution room for each year will dictate the maximum amount that you can contribute to your TFSA. Here are the annual TFSA dollar limit by year:
Year |
Contribution |
2025 2024 2023 2022 2021 2020 2019 2018 2017 2016 2015 2014 2013 2012 2011 2010 2009 |
$7,000 $7,000 $6,500 $6,000 $6,000 $6,000 $6,000 $5,500 $5,500 $5,500 $10,000 $5,500 $5,500 $5,000 $5,000 $5,000 $5,000 |
As a Canadian resident, holding a valid SIN (Social Insurance Number), once you are age of majority in your province, you are eligible to open a TFSA and start contributing to it. The government of Canada introduced the plan in 2009 for Canadian residents. If you were 18 or older in 2009, and have been a Canadian resident during all these years, and have never contributed to a TFSA, you will have $102,000 of contribution room available in 2025.
Any withdrawals (except qualifying transfers and specified distributions) made from a TFSA, will be added back to your contribution room at the beginning of next calendar year.
Opening a TFSA: How a self-directed account is different?
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A managed TFSA:
With a managed TFSA, you may open a registered TFSA with the help of a financial representative or an advisor at your financial institution or investment firm. The investments you can hold in this TFSA are restricted to the investment options offered by your financial institution. Typically, these would include GICs, savings accounts and your financial institution's mutual funds. -
A self-directed TFSAs:
With a self-directed TFSA, you have the ability to make the investment decisions yourself to buy and sell a range of investment options for your portfolio. With a TFSA from TD Direct Investing, these options include mutual funds, GICs, stocks, bonds and ETFs from Canadian and U.S. stock exchanges. Particular investment or trading strategies should be evaluated relative to each individual's objectives and risk tolerance.
The different types of investments you can hold within a TFSA
Cash in a TFSA
The cash portion of the TFSA can be a place to hold cash and cash equivalents such as High Interest Savings Accounts (HISAs). It may be a place to hold these investments for a long term, or only for a short period until you either decide to make an investment in a stock or bond or to withdraw the cash because you need the funds. With a High Interest Savings Account in a TFSA, subject to a minimum balance requirement, you can earn interest on the cash you hold.
GICs in a TFSA
What if you wanted to earn interest at a guaranteed rate while protecting your principal? GICs allow you to do exactly that. They can be a useful investment vehicle if you have a fixed-term savings goal like saving for a down payment. The trade-off is that the money you put in is usually not easily accessible for the length of the term. GIC terms differ and can range from a month up to 5 years. You can choose the length of time that works best for you. You can usually also choose how frequently you receive interest payments. For multi-year GICs, interest paid can be compounded. As you will receive your initial investment back (plus accrued interest) at the end of the term, GICs are generally considered a safe investment. Some self-directed TFSAs such as one from TD Direct Investing allows you to hold in one place a wide range of GICs that are offered by different financial institutions.
Bonds in a TFSA
Think of a bond as a loan you give to an organization or government entity. In a TFSA, you can get either government (federal, provincial, and municipal) or corporate bonds. Government bonds are generally considered less risky than corporate bonds, but the trade-off is a potentially lower rate of return. Bonds pay out periodic payments throughout the term. And, when compared to stocks, bonds may generally be considered less risky investments. Look for a bond with a term that matches the timeframe of your goals. A self-directed TFSA gives you the flexibility to hold multiple bonds and other securities within the same account.
Mutual Funds in a TFSA
Here's a quick primer on mutual funds. Each mutual fund is a portfolio that may contain stocks, bonds or other investable assets that are selected and managed by a professional fund manager. Allowing your investments to be professionally managed can have significant advantages. You can choose from a wide range of mutual funds depending upon your risk tolerance and growth objectives. As the value of mutual funds can fluctuate with the market, there is a degree of volatility and risk. Many investors consider diversifying their portfolio to enhance the potential return on their investments. If you want to pick and choose between mutual funds from different financial institutions, a self-directed TFSA may be the way to go. TD Direct Investing offers a range of professionally managed funds across all asset classes.
ETFs in a TFSA
Exchange traded funds (ETFs) can be purchased or sold on a stock exchange like a regular stock. In some ways they share similarities to mutual funds, in that they are a 'basket' of securities. But they can be passively managed and just track an index or a sector, or they can be actively managed by the ETF manager. Generally, while the fees attached to ETFs are often lower, some can also be higher than a mutual fund depending on the type of ETF. Unlike mutual funds, an ETF's value changes during the trading day as the securities within it fluctuate. With a TD self-directed TFSA with brokerages like TD Direct Investing,, you can invest in qualified ETFs offered by designated exchanges in Canada and the U.S.
Stocks in a TFSA
If your risk tolerance permits, you can also consider purchasing stocks in your TFSA. Your willingness to take on additional risk may potentially result in a higher rate of return but remember, it could also result in losses. You should make sure that the stocks you purchase are considered qualified investments i.e., they should be listed on a designated stock exchange such as the Toronto Stock Exchange (TSX) or the New York Stock Exchange (NYSE). The actual process of investing in stocks in a TFSA is essentially the same as in a non-registered investment account, but you don't pay tax on any capital gains and your profits are tax-free. Please note, if your trading activity appears to be a business (e.g., frequent trades, short holding periods, and a focus on profit), it could be classified as a business by the CRA and attract significant tax bill. At TD Direct Investing, you can trade on Canadian and U.S. markets including the TSX, NASDAQ and NYSE.
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