Tax-free savings accounts (TFSAs) have been around for a full decade now, having been introduced in 2009, and for most Canadians, a TFSA (along with a registered retirement savings plan (RRSP)) is now a regular part of their financial and tax planning.

TFSAs are, in many ways, the inverse of RRSPs. While TFSAs do not provide the tax deduction that an RRSP contribution creates, the strength of TFSAs lies in their great flexibility and the ability they give to Canadians to save, for short-term or long-term purposes, on a tax-free basis. Every Canadian aged 18 years of age and older can contribute a specified annual amount to a TFSA ($6,000 for 2019). Funds contributed to the TFSA are not deductible from income for tax purposes, but investment income earned by those funds is not taxed, either as it accrues or on withdrawal. Where a taxpayer does not contribute to a TFSA in a particular tax year, the contribution not made can be carried forward and that contribution made in any subsequent year. As well, TFSA holders can withdraw funds from their plan at any time, free of tax, and funds withdrawn can be re-contributed, but not until the following year. Therefore, each taxpayer’s contribution limit for a particular year is that year’s statutory annual amount, plus any allowable contributions not made in previous years and carried forward, plus amounts withdrawn in any previous year but not yet re-contributed.

The amount of the allowable TFSA contribution limit for a year has been something of a moving target since 2009: what follows is a listing of the maximum allowable annual contribution limits for each year since TFSAs were introduced.

• The annual TFSA dollar limit for the years 2009, 2010, 2011, and 2012 was $5,000.
• The annual TFSA dollar limit for the years 2013 and 2014 was $5,500.
• The annual TFSA dollar limit for the year 2015 was $10,000.
• The annual TFSA dollar limit for the year 2016, 2017, and 2018 was $5,500.
• The annual TFSA dollar limit for the year 2019 is $6,000.

It’s readily apparent that, especially where there are carryforward amounts and/or the taxpayer has made withdrawals from a TFSA, that calculating one’s current year contribution room can be complex. At one time the Canada Revenue Agency (CRA) notified taxpayers of their current year TFSA contribution limit on the annual Notice of Assessment, but that is no longer the case. Now, the easiest way to find out one’s current year contribution limit is by calling the CRA’s Individual Income Tax Enquiries Line at 1-800-959-8281 or its automated Tax Information Phone Service (TIPS) line at 1-800-267-6999. Taxpayers who have registered for the Agency’s My Account online service can use that service to find the same information. It’s also possible to obtain from the CRA a TFSA Room Statement and a TFSA Transaction Summary, with the latter showing the contributions and withdrawals which have been made.

It is important to stay within one’s overall contribution limit because exceeding that limit — even for one day — will result in the imposition of a penalty tax. Therefore, once the taxpayer knows figures out his or her total contribution limit for 2019, it’s time to make sure that current contribution plans for the year will not put the taxpayer in an overcontribution position. Some taxpayers contribute on a regular, often monthly basis, while others are in the habit of depositing regular or irregular or periodic income receipts, like a tax refund or tax benefit amount or a bonus from their employer, into their TFSA. Either way, after finding out one’s current year contribution limit, it’s necessary to calculate how much has already been contributed in 2019. The difference between those two figures represents the balance which can be contributed before the end of the year without getting into an overcontribution position and incurring penalties. And, it’s important to remember that if withdrawals have been or will be made during 2019, those amounts cannot be re-contributed until after the end of this year.

If it’s necessary to adjust regular contributions in order not to go “offside” by the end of the year, the best time to do it is obviously before getting into that overcontribution position. As soon as a taxpayer is in an overcontribution position, however, a penalty tax of 1% per month of the excess is imposed, even if the excess funds are withdrawn before the end of the month — in other words, as explained in the Canada Revenue Agency guide to TFSAs “[I]f, at any time in a month, you have an excess TFSA amount, you are liable to a tax of 1% on your highest excess TFSA amount in that month.”

Especially where TFSA contributions are set up to occur regularly, by automatic deposit or bank transfer, it’s easy to assume that everything has been taken care of and nothing further needs to be done with respect to such arrangements. However, an “out of sight and out of mind” approach rarely makes for good financial and tax planning, and checking on the status of one’s TFSA on a periodic (at least quarterly) basis can help to ensure that everything is as it should be, and that unnecessary penalties are avoided.

One final consideration — one of the strengths of a TFSA as a savings vehicle is the ability to re-contribute funds which have been withdrawn. However, as outlined above, such re-contributions cannot be made until after the end of the calendar year in which the withdrawal was made. For that reason, taxpayers who may be contemplating a TFSA withdrawal early in 2020, perhaps in order to make an RRSP contribution, or to pay for a winter vacation, should make that withdrawal before the end of 2019. That way, should funds become available (perhaps through the tax refund generated by the RRSP contribution) it will be possible to make the re-contribution in 2020. If the withdrawal is not made until 2020, re-contribution will not be possible (without incurring a penalty) until 2021.

TFSAs are valuable savings and planning vehicles for Canadians — perhaps the most flexible such vehicle available. It’s easy, however, to get tripped up on the rules governing TFSAs, especially the rules around withdrawals and re-contributions. To help keep taxpayers from running afoul of those rules, the Canada Revenue Agency provides a lengthy and detailed publication on TFSAs, and that publication is available on the CRA website at https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/rc4466/tax-free-savings-account-tfsa-guide-individuals.html.