A tax-free savings account allows you to put money aside and watch it grow tax-free. This allows Canadians residents (age 18 or above) to save for short term and long-term requirements. The income earned in TFSA is tax-free. Withdrawals from a TFSA are also tax-free as contributions are not tax-deductible. That means if you earn $5,000 on your investment, it is 100% yours to keep without any tax obligation. This money can be used as a cushion in case of emergency, like losing a job or for an unexpected expense like car or house repairs.
Benefits of TFSA
Opportunity to earn tax-free investment income: Unlike other registered tax-deferred plans, earnings throughout your lifetime from qualified investments in your Tax-Free Savings Account—whether interest, dividends or capital gains—are never subject to Canadian tax. You don’t need to pay taxes even when you withdraw your money.
Flexibility to withdraw your savings, tax-free: You can withdraw funds from your TFSA whenever you want (depending on what you’ve invested in) and use the funds for multiple purposes. This makes a TFSA ideal for both your short and long-term investment goals. For example, you could save to purchase a new car, renovate your home, buy a new home, start a small business, take a vacation, build an emergency fund, etc.
No Earned Income Requirement: You do not need to have earned income to contribute to a TFSA. This is excellent news if you are retired or a stay-at-home parent. (Your spouse or common-law partner can give you funds to contribute to your own TFSA. There are no tax consequences to either you or your spouse.