Tax-Free Savings Account (TFSA) started in 2009 as a program to promote savings by making the investment earnings within the account tax free. To open an account, you must be a Canadian citizen above the age of 18 with a valid social insurance number. The max amount of contribution you can make to your account per calendar year is $5500 (as of 2018). Learn more about contribution limits here.
Generally speaking, TFSAs are more flexible than other registered savings accounts (RRSPs, RRIFs, LIRA etc). Below are some of the main advantages of TFSAs.
TFSA contribution limits are not determined by your employment income like RRSPs are, every Canadian over the age of 18 receives annual contribution room. For example, if one spouse earns an income when the other does not, the income earning spouse can contribute to the non-income earning spouses TFSA and take advantage of the additional contribution space.
The earnings within a TFSA are not subject to income tax, hence the name of the account. This presents an opportunity to hold investments that attract higher tax rates in these accounts, like fixed income or foreign equity investments which are taxed at your marginal rate.
Money can be withdrawn from your TFSAs at any time for any purpose, without limitations or tax consequence. Funds withdrawn can be re-contributed the following year, no earlier. Any contribution room not used in any one year is carried forward to future years.
Withdrawals from a TFSA do not count as taxable income. As a result, withdrawals from a TFSA cannot effect your eligibility for government benefits like Old Age Security (OAS), Age Amount credit etc.
TFSAs are often seen as short to medium term savings accounts. Due to their tax free withdrawal status, and their ability to name beneficiaries, they also great tools for the purposes of retirement income and estate planning.
Note: TFSA account holders often mistakenly over contribute to their accounts, which can lead to a 1% penalty tax charged monthly on the amount exceeding the limit.