How do TFSAs work? It’s not as straightforward as it first appears.
Start with the basics. The government has increased the TFSA contribution limit several times since the account was introduced in 2009. As of 2017 the cumulative limit stands at $52,000. An additional annual increase of $5,500 is expected on January 1, which would raise the total to $57,500. That part is simple.
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The complication arises when you try to determine your personal total contribution room. If you were at least 18 in 2009, how much can you contribute today? The answer depends on a few factors, and some Canadians end up with much more room than the simple sum of annual dollar limits might suggest. To help with this we built a tool for readers to calculate their TFSA contribution room.
Here’s a practical example. Suppose you turned 18 in 2009 and contributed the full allowable amount every year. Over time your investments performed exceptionally well and your TFSA grew to $100,000. You then withdraw the entire $100,000 to use as a down payment on a cottage. What is your contribution room on the first day of the following year?
The answer: $105,500.
How your TFSA room is calculated
Your personal TFSA contribution room on any given date is determined by combining three elements:
- the cumulative TFSA dollar limits for the years you were eligible;
- any unused contribution room carried forward from previous years; and
- any withdrawals you made in the previous year, which are added back to your room at the start of the next calendar year.
In the example above, your cumulative dollar limit up to the current year is $52,000 and you used it all, so there is no unused room to carry forward. Because you withdrew $100,000, that withdrawal amount is added back to your contribution room at the beginning of the next year, together with the new annual increase (assumed here to be $5,500). That gives you $100,000 + $5,500 = $105,500 of contribution room on January 1.
An important point: any amount you withdraw—whether it was your original contribution, investment gains, dividends or interest—will be added back to your TFSA contribution room in the following calendar year. This is a key difference between TFSAs and accounts such as RRSPs, where a withdrawal does not restore your contribution room.
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A mistake we made (and what to watch for)
When we launched our TFSA calculator we mistakenly treated the contribution limit like a hard cap similar to an RRSP limit. Several readers caught the error and pointed it out—thank you. The reality is that withdrawals restore contribution room, which can work in your favour if your investments have appreciated.
However, the rule can also work against you. If, instead of growing to $100,000, your TFSA investments declined to zero and you withdrew everything, you would only regain the new annual contribution limit (for example, $5,500) at the start of the next year, since there would be no withdrawal amount to add back beyond that.
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If you have made multiple withdrawals and contributions over the years, the easiest way to confirm your exact available TFSA room is to contact the Canada Revenue Agency (CRA). Have your most recent Notice of Assessment ready. Dan Bortolotti, an associate portfolio manager at PWL Capital in Toronto, recommends waiting until early March to call so the CRA can provide the most up-to-date figures following the annual updates.
For official guidance on how withdrawals and re-contributions work, consult the CRA’s TFSA information on withdrawals and replacement rules.
If you’re unsure about how to manage contributions, withdrawals or investment choices within a TFSA, consider using the available calculators to estimate your room and keep records of all transactions to avoid overcontributing. Overcontributions can trigger penalties, so tracking your balance and contribution history is important.