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The TFSA is a great way to save money – but beware of these pitfalls

Common mistakes to avoid with this unique type of savings account.

Since they were first introduced in 2009, millions of Canadians have enjoyed the benefits of having a Tax-Free Savings Account (TFSA). This flexible, general-purpose savings vehicle allows for annual contributions that can be withdrawn at any time down the road. And investment growth that accumulates each year can be withdrawn tax free. Unlike a Registered Retirement Savings Plan (RRSP), you can’t claim a tax deduction for contributions made to your TFSA – and withdrawals are added back to your contribution room for the following year. There are also a few things to keep in mind regarding this straightforward type of savings account. The following guide can help you avoid making mistakes or missing opportunities that could cost you money.


Every year, there is a set amount that you can contribute to your TFSA, with the added bonus that any unused contribution room is carried forward. The contribution amount for 2021 is $6,000. If you’ve never contributed before, you could have as much as $75,500 in room dating back to when the TFSA was first introduced.

It’s important to contribute no more than the amount that is available to you, because overcontributions are subject to a penalty. Canada’s Income Tax Act imposes a penalty of one per cent per month on the highest excess contribution amount at any time during the month. If you do contribute too much, the excess amount can be withdrawn to eliminate the penalty tax for subsequent months.

One or more …

Sometimes two is better than one, and you may have set up a second TFSA. There is no restriction on how many TFSAs you have. However, if you are contributing to more than one, keeping track of your deposits is vital to avoid overcontributing and the penalties that go with it. (See the section above.)

Why would you want two TFSAs? Maybe you have very specific savings goals that you want to keep separate, such as a vacation fund and a renovation fund. Or sometimes it’s a case of wanting to get a better deal with another financial institution. Refer to this example from the Canada Revenue Agency.

Withdraw or transfer?

If you have made the decision to open a second TFSA, you can transfer money from one account to another without affecting your contribution limits. However, if the funds are paid to you first, it will be considered a withdrawal and your TFSA room for the withdrawal amount won’t be reinstated until the next calendar year. Recontributing to any TFSA in the same year as the withdrawal runs the risk of overcontribution and the penalties that go with that.

TFSAs and retirement

Unlike an RRSP, when you retire you can withdraw the proceeds of a TFSA tax free. Since you have already paid tax on the contributions, they compound tax free inside of the TFSA, and can be withdrawn at any time. The rules around withdrawing from an RRSP are different, and the income is taxable.

What’s interesting to note in using a TFSA for retirement planning is that withdrawals do not count as taxable income, so they don’t affect income-tested benefits such as Canada Pension Plan (CPP) and Old Age Security (OAS). In contrast, income from a Registered Retirement Income Fund (RRIF) or Life Income Fund (LIF) will count as taxable income and may result in a clawback of CPP or OAS. It’s always wise to speak with your advisor about all possible options.

TFSAs and estate planning

There are some important considerations to keep in mind about TFSAs during the estate planning process. If a spouse1 is named as the beneficiary of a TFSA, an amount up to the value of the TFSA at the time of death can be contributed to their TFSA without affecting their TFSA contribution room. But this can only happen if the contribution is made before the end of the year following the year of death and is designated as an exempt contribution. Any income earned between the date of death and the contribution will be taxable to the spouse.

For this reason, it’s often recommended that, where permitted, the holder names a spouse as successor holder instead of as beneficiary.2 On the holder’s death, the spouse automatically becomes the new holder of the TFSA. The TFSA continues to exist and both its value at the date of death and any income earned after that date continue to be sheltered from tax under the new successor holder. In addition, naming a spouse as successor holder avoids the administration and filing requirements necessary to preserve the tax-free status of the TFSA funds when a spouse is named as beneficiary.

Keep Uncle Sam informed

U.S. citizens and other U.S. persons (e.g., green card holders), even those living in Canada, are required to report their worldwide income to the U.S. Internal Revenue Service each year. This includes any income earned in a TFSA, because there’s no treaty relief for TFSAs. Whether U.S. taxes will ultimately have to be paid depends on the particular facts and whether sufficient foreign tax credits are available. Individuals with such circumstances should speak to a cross-border tax specialist before investing in a TFSA.

The significance of a TFSA as a powerful savings option will only grow over time. However, to fully maximize the benefits and avoid the pitfalls, it’s important to speak to your advisor to understand how they work and how they can best work for you.





[1] All references to spouse include common-law partners, as defined in the Income Tax Act (Canada). The spouse must designate the contribution as an exempt contribution on Form RC240, Designation of an Exempt Contribution — Tax-Free Savings Account (TFSA) and submit the designation within 30 days after the contribution is made.

[2] In Quebec, the equivalent of a successor holder can be named only on a deferred annuity or segregated fund contract that has a life insured (the measuring life) different than the owner of the contract. Our contracts don’t allow this option on a TFSA. Outside Quebec, certain contracts may provide that if a spouse is named as the sole beneficiary, the spouse will automatically continue the contract as the successor holder and the applicable successor holder rules would apply. (It’s possible this stipulation wouldn’t apply in Quebec. Speak to your advisor about this topic. In addition, in Quebec, it’s possible to designate a beneficiary on a TFSA only if the product in which the TFSA invests is a deferred annuity or a segregated fund contract.) In these situations, the investor’s spouse may have the option to be treated as a beneficiary of the contract and the beneficiary rules would apply.


© 2021 Manulife. The persons and situations depicted are fictional and their resemblance to anyone living or dead is purely coincidental. This media is for information purposes only and is not intended to provide specific financial, tax, legal, accounting or other advice and should not be relied upon in that regard. Many of the issues discussed will vary by province. Individuals should seek the advice of professionals to ensure that any action taken with respect to this information is appropriate to their specific situation.

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