The Canada Revenue Agency has confirmed the TFSA (Tax-Free Savings Account) contribution limit for 2025. Individuals who are considering opening a TFSA or already have an account should be aware of the contribution limit in order to comply with the rules.
The agency has a limit on TFSA contributions to ensure fairness in the tax system and prevent any practice that can lead to people reducing their tax bill by contributing more. Canadians should know the contribution limit to avoid consequences and fulfill their responsibility.
2025 TFSA Contribution Limit
A tax-free savings account is a program that began in 2009 for individuals who are 18 or older to save money or invest and withdraw money tax-free. The program enables the citizen to invest his money and secure money for the future.
Many Canadians contribute to TFSAs, but they should know that the agency has set a certain contribution limit for TFSAs so that people are not burdened to contribute more and the government can maintain a stable income. The contribution people make to a TFSA is non-deductible, and the income you earn from the investment is not taxable.
The agency publishes the contribution limit each year to ensure that it corresponds to inflation and that citizens can contribute without any financial burden. The CRA announced a 2025 TFSA contribution limit of $7,000, the same as the 2024 contribution limit. The $7,000 contribution limit has held the record for the second highest contribution limit over the years.
How to calculate the TFSA contribution limit?
The CRA determines the TFSA contribution limit based on the indexed rate of inflation in the previous year. Citizens take the current year’s TFSA limit, add unused room for contributions from previous years, and subtract withdrawals from the previous year to get their contribution limit.
A participant’s contribution room is the total amount of the current year’s TFSA limit, withdrawals made from the TFSA account last year, or unused contribution room from previous years.
For example, you opened a TFSA this year and contributed $3,000 in the first month, added $2,000 later, then withdrew $1,000 and didn’t contribute again all year, so next year you can add the amount withdrawn and the contribution limit for the year.
TFSA account holders can find TFSA contribution room information in their account or on the CRA mobile app or by calling the Tax Information Hotline at 1 800 267 6999. A TFSA participant should know that the TFSA contribution grows each year, even if you don’t report income tax.
What happens if you contribute too much to a TFSA?
If a TFSA participant pays over the contribution limit, they must face the consequences. Excess contributions will be taxed under the Canadian tax system as your income, for every $1 over the contribution limit it will be taxed at a rate of 1%.
The 1% tax each month is based on the highest TFSA contribution in your account each month, meaning a 1% tax rate applies for a given month even when the overpayment is withdrawn in the same month.
So savers should know if they want to take advantage of a tax-free savings account that they have to keep in mind the contribution limit otherwise there would be no benefit as the excess amount will be taxed.
What are the TFSA withdrawal rules?
Canadian savers who have opened a TFSA should be aware that withdrawals from the TFSA depend on the type of investments you have in the TFSA. However, savers should know that transferring a TFSA to your other TFSA is not a withdrawal.
If you’re thinking about withdrawing from a TFSA, you should know the TFSA withdrawal rules to make sure you follow the rules:
- Withdrawing from TAFSA did not reduce the amount of contributions you made for the year.
- A TFSA account has no withdrawal limit, so participants can withdraw any amount whenever they want from the TFSA.
- Money withdrawn from a TFSA account is tax-free income, so you don’t have to worry about paying taxes on it.
- If you want to deposit the amount you withdrew from your TFSA, you must wait a year to contribute to the account.
The CRA advises TFSA participants to withdraw money when they need a large amount, otherwise let it grow. So, if you have large expenses in the coming year, you should withdraw before December 31, 2024. With this approach, you can cancel your contribution room for 2025, and the withdrawal amount will be added to your contribution limit.
When do you have to pay tax on TFSA withdrawals?
TFSA money is not taxable, however, there are certain conditions where individuals must pay tax, such as:
- When you deposit the excess and withdraw the amount in the same month, you are required to pay tax at the rate of 1%.
- When you invest TFSA money through a prohibited investment, you must pay tax on the investment, so participants are advised to read the TFSA investment guidelines carefully.
- When non-residents contribute to a TFSA, they must pay tax on the contributions at a rate of 1%.
- When TFSA participants make non-qualified taxable investments, they may have to pay market value tax on the non-qualified investment, with the tax value in some cases reaching 50% to 100%.
A TFSA is a great investment tool to save and grow money for Canadians 18 or older with a valid SIN, however, participants should keep in mind the contribution limit for each year to manage the account well and avoid tax consequences.
