The Tax-Free Savings Account is one of the best investment vehicles available to Canadians, but only if they put it to good use! Here’s how to calculate your TFSA contribution limit.
Fast facts about your TFSA contribution room:
- the 2022 TFSA contribution limit is $6,000 and the total possible lifetime contribution limit is $81,500
- you are entitled to the total TFSA contribution room that’s accrued since the year you turned 18 or 2009, whichever is most recent
- the CRA tracks your TFSA contributions and withdrawals, but their calculation is not current and therefore can be incorrect
- when you make a withdrawal from your TFSA, the contribution room gets added back the following year
- you can have as many TFSAs as you want, as long as you do not go over your annual and lifetime contribution limits
What is the Tax-Free Savings Account (TFSA)?
The Tax-Free Savings Account (TFSA) is a registered account to help Canadians save and invest money. All the investment income earned within this account, including dividends, interest, and capital gains, is completely tax-free. Every Canadian is entitled to the same amount of TFSA contribution room, depending on the year they were born.
Here is the lifetime TFSA room allotted to Canadians based on the year they were born:
If you want to learn about the TFSA in more detail, check out these posts:
This post is about calculating your personal TFSA contribution room.
The TFSA Contribution Limit year by year
Here is the annual TFSA contribution limit for each year since it came into existence:
The year you turned 18 marks the beginning of your eligible TFSA contribution room.
Using the Canada Revenue Agency website to calculate your TFSA contribution limit
Because the Tax-Free Savings Account is a registered account, it’s tied to your Social Insurance Number. The CRA keeps track of your contributions and withdrawals. Therefore, one of the easiest ways to calculate your TFSA contribution limit is to simply log into your CRA my account and view it. However, this information may not be correct!
Even the CRA admits they are slow to update your Tax-Free Savings Account numbers, and you should compare their total to your own records to be sure.
How to calculate your TFSA contribution limit
Your TFSA contribution room is determined by the year you turned 18. To see how much you have, reference the chart above. However, if you’ve been contributing to and withdrawing from the account, it gets harder to keep track of how much you can put in. The formula to calculate your personal TFSA contribution limit is as follows:
your total lifetime contribution room
– contributions made in previous years
+ withdrawals from your TFSA in previous years
= your total TFSA contribution limit
For example, someone born in 1987 who’s put $10,000 in their TFSA so far and made now withdrawals, would calculate their room as follows:
$81,500 lifetime contribution room
– $10,000 already contributed
+ $0 made in withrdawals
= $71,500 contribution room remaining
Clear as mud? Let’s break it down further.
Determining your TFSA limit for 2022
Are you currently already over the age of 18 or turning 18 years old in 2022? Congratulations! You’re entitled to the 2022 TFSA contribution room which is $6,000. This means you can deposit at least $6,000 in a TFSA this year.
Attention residents of Quebec!
There is an exception: you’re turning 18 in 2022 and you live in Quebec. If you live in Quebec, you are still entitled to your TFSA contribution room this year, but you can’t actually open a TFSA until you turn 19 years old.
The Tax-Free Savings Account is product from a Government of Canada, which is why it’s available to everyone. However, Quebec has its own rules about when you reach the age of majority, which is why you can’t contribute to your TFSA until the year you turn 19. When you turn 19 in Quebec, you’re entitled to the TFSA contribution room for the year you turned 18, as well as each year going forward.
Are you a Canadian citizen living abroad?
The other exception to TFSA contribution room is you must be a resident or have residential ties to Canada. As a Canadian citizen, you’re eligible for the Tax-Free Savings Account contribution room that accrues while you live in Canada. However, if you’re considered a non-resident for tax purposes, you are not entitled to that TFSA contribution during that time.
If you live outside of Canada throughout the tax year, or you stay in Canada less than 183 days during the tax year, you may be considered a non-resident an ineligible for TFSA contribution room. You can read more on the Government of Canada website here.
If you open a TFSA and then leave Canada and become a non-resident, you do not need to empty or close your TFSA. You will simply not accrue additional contribution room while you are not considered a resident of Canada.
Investment income in your Tax-Free Savings Account does not affect your contribution room (ever!)
The whole point of the Tax-Free Savings Account is for the income it earns to be tax-free. So when you grow your money in your TFSA, that never takes away from your contribution limit.
For example, let’s say you were born in 1983 and have a fully funded TFSA of $81,500. Thanks to interest and dividends, your TFSA balance grows to $85,000 in 2022. Does your contribution room go down next year to account for the $3,500 in extra money? Not at all! You’ll still be entitled to the full 2023 contribution room, and can continue to grow your TFSA even more.
Interest, dividends, and capital gains DO NOT take away from your annual or lifetime TFSA contribution room, even if the balance in your TFSA grows beyond these limits.
Previous TFSA withdrawals get added back as contribution room the following year
One of the best things about the TFSA is you never lose your contribution room. If you make a withdrawal from your TFSA, that contribution room gets added back the following year. However, because you have to wait for the next calendar year to start for that contribution room to become available again, you do have to watch your withdrawals and contributions if your TFSA is maxed out or close to it!
For example, let’s say you were born in 1990 and you’ve fully funded your TFSA with $81,500 of contributions. You take out $3,000 to go on vacation in July. In September, you receive a bonus at work and want to replenish your TFSA. Stop!
You’re totally out of contribution room, and you’ll actually need to wait until January 1, 2023, to contribute further to your TFSA without penalty.
Understanding when withdrawals get added back as additional contribution room is particularly important if you’re moving your Tax-Free Savings Account from one financial institution to another.
Often banks or brokerages will charge as much as $150 to transfer your registered account. If you are near the end of the year, you can avoid this fee by simply withdrawing your entire TFSA, waiting for the calendar to turn over to January 1, and then depositing your cash in your new TFSA in the new year.
There are penalties for over-contributing, so know your limits!
What happens if you ignore your TFSA contribution limit and just throw as much money as you want in there? The Government of Canada is watching, and they’ll charge you a penalty fee of 1% per month of the over-contributed amount until you withdraw it. It’s best to play by the rules.
Once you know how much Tax-Free Savings Account contribution you have, you can start saving and investing. Nothing beats tax-free income, so work hard to max out this account as soon as you can!