For many Canadians, building an emergency fund is easier said than done. According to the National Payroll Institute’s 2026 Annual Survey of Working Canadians, 28% of employed Canadians are living paycheque to paycheque, meaning they’d struggle to meet their financial obligations if their pay were delayed by just one week.
That’s why I generally recommend keeping at least six months of essential living expenses in an emergency fund. Ideally, I’d work toward a full year, particularly for households with dependants, mortgages, or uncertain employment. But emergencies don’t always wait until you’ve finished saving. When an unexpected expense arises, you might have little choice but to tap your investments.
I’d generally avoid withdrawing from a Registered Retirement Savings Plan (RRSP) unless absolutely necessary. Withdrawals are usually taxable, may trigger withholding tax, and permanently reduce the contribution room associated with the withdrawn funds. A Tax-Free Savings Account (TFSA) offers considerably more flexibility.
However, there are some important rules to understand before using your TFSA as a source of emergency cash. I’d also consider keeping part of the account in relatively stable, liquid investments rather than putting everything into stocks.
Understand the TFSA withdrawal and contribution rules
The biggest advantage of a TFSA is that you can withdraw money whenever you need it without triggering Canadian income tax. However, withdrawing money doesn’t immediately restore your contribution room. Instead, the amount withdrawn is added back to your available contribution room on January 1 of the following calendar year.
For example, suppose you’ve already used all your TFSA contribution room and withdraw $10,000 in November 2026 to cover an emergency. You cannot simply redeposit that $10,000 in December without exceeding your contribution limit. You must wait until January 1, 2027, when the withdrawal amount becomes available again, alongside any new annual contribution room for which you’re eligible.
If you still have at least $10,000 in unused contribution room, you could re-contribute sooner. The important distinction is that the withdrawal itself doesn’t create additional room until the next calendar year. Excess contributions are generally subject to a 1% monthly tax on the highest excess amount during the month.
I’d also be careful about relying entirely on the Canada Revenue Agency’s online TFSA contribution room figure. Financial institutions report transactions after the fact, so the displayed balance may not reflect recent deposits or withdrawals. The safest approach is to maintain your own records across every TFSA you hold, including contribution dates, withdrawal amounts, and available room.
Why I’d Keep Some Cash-Like Investments in a TFSA
For someone investing over several decades, a 100% equity portfolio can offer substantial long-term growth potential. However, I wouldn’t necessarily put every dollar of my TFSA into stocks if I might need to withdraw money unexpectedly.
Imagine an emergency occurs during a bear market. If your portfolio has fallen 30%, selling stocks to cover the expense could force you to realize losses at an inconvenient time.
That’s why I think maintaining a modest allocation to cash or short-term fixed income can make sense, especially if your TFSA also serves as a backup emergency fund. One option I’d consider is the Harvest Canadian T-Bill ETF (TSX: TBIL).
TBIL invests in short-term Government of Canada Treasury bills, which carry very low credit risk and relatively little sensitivity to interest rate changes. The ETF has a 0.11% management expense ratio (MER) and offers a 2.3% annualized yield, with distributions paid monthly.
Unlike a non-redeemable Guaranteed Investment Certificate (GIC), TBIL trades on the Toronto Stock Exchange, allowing investors to generally buy or sell units with ease during regular market hours.
However, TBIL isn’t covered by Canada Deposit Insurance Corporation (CDIC) protection, and its principal isn’t guaranteed. Its net asset value can fluctuate, even though its short-duration government holdings generally produce relatively low volatility.
Still, I personally think this feature of TBIL is an acceptable trade-off for daily liquidity, unlike GICs that generally cannot be redeemed prior to maturity without incurring a penalty.