Are TFSA investment incomes taxed inside the account?

• A. Yes; all income is taxed annually.
• B. Only on capital gains.
• C. No; investment income inside TFSA is not taxed.
• D. Only if it is foreign-sourced.

Answer: (C)

TFSA investments are not taxed inside the account. Any investment income—interest, dividends, or capital gains—grows tax-free while it stays in the TFSA, and withdrawals are also tax-free. This is because contributions are made with after-tax dollars, and the benefit of a TFSA is the tax shelter on earnings rather than an upfront deduction. So there’s no annual tax on the earnings within the account, and you won’t pay tax when you withdraw. The other statements don’t fit because TFSA earnings aren’t taxed in the year they’re earned, aren’t taxed only for capital gains, and aren’t taxed only if the income is foreign-sourced. (Note: foreign withholding taxes may apply to dividends from some foreign investments, but that doesn’t create Canadian tax on TFSA earnings inside the account.)