Tax-free savings account (TFSA) contribution rules
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Tax-free savings account (TFSA) contribution rules

Tax-free savings account (TFSA) contribution rules
 
 
Tax-free savings account (TFSA) contribution rulesIncome Tax Act s. 207.01(1)
 
 
 
 
 
The basic rules relating to tax-free savings account include the following:Contributions can be made by Canadian residents aged 18 or over at the time of the contribution.Up to $5,000 per year ($5,500 for 2013) can be contributed, with unused contribution room being carried forward.The annual contribution limit is indexed to inflation in $500 increments (i.e., to the nearest $500), in the same manner as personal tax credits and tax brackets are indexed. 
 
 
 The 2013 TFSA limit is $5,500.  The Department of Finance announced this in a news release on November 26, 2012.There is no lifetime limit to the amount of contributions.If a person has contribution room, but no funds to contribute, they may contribute funds given to them by their spouse or common-law partner, with no attribution of income to the spouse.Contributions can consist of in kind contributions of qualified investments.  At the time the investments are contributed, there is a deemed disposition.  Any resulting capital gain will be taxablecapital loss cannot be claimed - see our article Transfer shares to a registered account, but not at a loss!The easiest way to establish a record of your TFSA contribution room is to file a tax return annually, even if you have no taxable income.  Your TFSA contribution room can then be seen through Canada Revenue Agency's My Account or Quick Access e-services, or you can phone CRA to get the balance.  However, the amount reported will only be correct as of January 1st of each year, after financial institutions have reported all TFSA transactions for the prior year, which may not be until the end of March.  Thus, it's important to track this yourself.  The history of annual limits for each year is shown in this table:  The first year that contributions could be made was 2009.
 
YearsTFSA Annual
Limit
Cumulative
Total
2009-2012$5,000$20,00020135,50025,500CRA says that Individuals who have not filed returns for prior years (because, for example, there was no tax payable) would be permitted to establish their entitlement to contribution room by filing a return for those years or by other means acceptable to the CRA.The tax payable for excess contributions to a tax-free savings account is 1% per month, for any month in which there is an excess amount at any time in the month
 
 
 
 This means there will be a tax payable even if the excess amount is withdrawn in the same month in which it is contributed.There is no deadline for contributions to a TFSA, as the unused contribution room is carried forward into the next year.  However, a withdrawal in any year does not increase the TFSA room until the following calendar year.  Thus, if you are thinking of making a withdrawal close to year end, make sure it is done by December 31st, in order to have the withdrawal amount added back to the TFSA room sooner.Tax Tip:  If you have a loss on your investment, don't transfer it to your TFSA.
 
 
Tax-free savings account (TFSA) excess contributions
 
 
Your contribution room is determined at the beginning of each tax year.  If you have $5,000 in contribution room, and make a $5,000 deposit to your TFSA, then you cannot make further contributions to your TFSA in the same tax year, even if you make a withdrawal.  Withdrawn amounts will increase your contribution room, but not until the next tax year.
The tax payable for excess contributions to a tax-free savings account is 1% per month, for any month in which there is an excess amount at any time in the month.  This means there will be a tax payable even if the excess amount is withdrawn in the same month in which it is contributed.  You may also be charged a penalty of 100% of any income earned from the excess contribution.
Timing is important!
Example 1:  John had $5,000 contribution room at the beginning of 2012.  He made the following TFSA transactions:
 
Deposit of $5,000 on February 4th
 
Further deposit of $4,000 on February 15th
 
Withdrawal of the $4,000 excess contribution on February 25th, after he realized his mistake.
The excess contribution amount is $4,000 for February 2012, and John will pay a tax of 1% x $4,000, or $40.
Example 2:  Jane had $5,000 contribution room at the beginning of 2012.  She made the following TFSA transactions:
 
Deposit of $5,000 on March 3rd
 
Withdrawal of $5,000 on June 4th
 
Further deposit of $4,000 on July 10th
 
Excess contribution of $4,000 not withdrawn
The excess contribution amount is $4,000, for the months July to December inclusive.  The tax payable is $4,000 x 1% x 6 months, or $240.
Transferring Your Tax Free Savings Account
If you want to transfer your TFSA to another financial institution, DO NOT just withdraw the funds, then re-deposit into an account at the new financial institution.  This would constitute a withdrawal, and you cannot re-contribute the funds until the following year.  You must get the new financial institution to do the paperwork to transfer the funds in the correct manner.
Letter / TFSA Return From Canada Revenue Agency
If you receive a TFSA return from Canada Revenue Agency (CRA) asking to provide further information about your TFSA due to an apparent over-contribution in 2010, it is important to respond to the letter within 60 days.  An August 19, 2011 news release indicates that CRA will be as flexible as possible in cases where a genuine misunderstanding of the TFSA contribution rules occurred.  According to a CTV News article, this is still the case in 2012.  You will be able to ask CRA to review your specific file and, where appropriate, waive taxes on excess contributions.
Keep Accurate Records of Your TFSA Deposits
You can use My Account on the CRA website to see the amount of your available TFSA contribution room.  However, the information in My Account will not include any contributions that you have made in the current year.  In fact, information for the prior year is not updated until financial institutions have filed their information slips with CRA in the following year, perhaps as late as April.  For this reason, it is very important to keep accurate records yourself.
Tax Tips:
Know the rules, and do not make excess contributions!
If you did make an excess contribution, withdraw the amount ASAP.
 
 
Tax-free savings account investments
Qualified investments are permitted to be held in a TFSA.  Qualified investments generally include all RRSP qualified investments, as long as these are arm's-length investments.
Non-qualified and prohibited investments may not be held in a TFSA:
 
Non-qualified investments include, for example, land and general partnership units.
 
Prohibited investments are specifically identified in the Income Tax Act, and include property that is
 
a debt of the TFSA holder
 
shares in, an interest in, or a debt of
  1. a corporation, partnership or trust in which the holder has a significant (10% or greater) interest, or
2.            a person or partnership that does not deal at arm's length with the holder, or with a person or partnership described in (i)
When prohibited or non-qualified investments are held in a TFSA, taxes will apply.  Non-qualified and prohibited investments are tax differently.  See taxes payable re TFSA, which also discusses proposed amendments regarding these taxes.
Tax Tip:  Don't hold non-qualified or prohibited investments in your TFSA.
 
 
Tax-free savings accounts (TFSA) unused contribution room
The TFSA contribution room accumulates if it is not used, and can be used at any time in the future.  The unused contribution room at the end of a calendar year is the positive or negative amount determined by the formula
A + B + C - D where
 
 
A     is the unused contribution room at the end of the previous calendar year
 
B     is the total of distributions (withdrawals) made in the preceding calendar year
 
C     is the TFSA dollar limit for the calendar year ($5,000 for 2009), if at any time in the calendar year the individual is 18 years of age or older and resident in Canada
 
D     is the total of contributions made to a TFSA by the individual in the calendar year
Certain distributions and contributions are excluded from the above formula:
 
transfers made directly between TFSAs held by the same person
 
transfers made as a result of a marital breakdown, under certain conditions
 
withdrawals which are made to reduce or eliminate an excess contribution
 
exempt contributions made by a surviving spouse/common-law partner of a deceased TFSA holder
The tax payable for excess contributions to a tax-free savings account is 1% per month, for any month in which there is an excess amount at any time in the month.  This means there will be a tax payable even if the excess amount is withdrawn in the same month in which it is contributed.
Keep Accurate Records of Your TFSA Deposits
You can use My Account on the CRA website to see the amount of your available TFSA contribution room.  However, the information in My Account will not include any contributions that you have made in the current year.  In fact, information for the prior year is not updated until financial institutions have filed their information slips with CRA in the following year, perhaps as late as April.  For this reason, it is very important to keep accurate records yourself.
Tax Tip:  A TFSA withdrawal will increase your contribution room, but not until the following year.
 
 
 
 
Taxes payable re tax-free savings accounts (TFSAs)Withholding taxes on foreign dividends in a TFSA
Withholding taxes will be deducted from foreign dividends received in a TFSA, and these taxes are not recoverable.  The Canada-United States Tax Convention (Treaty) provides for US dividends and interest to be received free of tax when earned by a trust which is generally exempt from income taxation in Canada, and which is operated exclusively to administer or provide pension, retirement, or employee benefits.  S. 146.2 of the Income Tax Act states that a TFSA is deemed not to be a retirement savings plan.
 
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Tax on TFSA excess amountIncome Tax Act s. 207.02
The tax payable for excess contributions to a tax-free savings account is 1% per month, for any month in which there is an excess amount at any time in the month.  This means there will be a tax payable even if the excess amount is withdrawn in the same month in which it is contributed.
The calculation of the amount subject to tax is made on CRA form RC243-SCH-A Schedule A - Excess TFSA Amounts.  The calculation of the tax payable is made on CRA form RC243 Tax-Free Savings Account (TFSA) Return.
Tax on non-resident contributions to a TFSAIncome Tax Act s. 207.03
If a non-resident individual makes a contribution to a TFSA, the tax payable is 1% of the contribution amount per month, until either
 
the total amount is withdrawn, or
 
the individual becomes resident in Canada
The calculation of the amount subject to tax is made on CRA form RC243-SCH-B Schedule B - Non-Resident Contributions to a Tax Free Savings Account (TFSA).  Note that if only part of the amount is withdrawn, tax is still payable on the entire amount until the remaining contribution is withdrawn.  The calculation of the tax payable is made on CRA form RC243 Tax-Free Savings Account (TFSA) Return.
Waiver of tax payable for a TFSAIncome Tax Act s. 207.06
The Minister of National Revenue may waive or cancel all or part of the tax payable regarding excess amounts or non-resident contributions if
 
the liability arose as a consequence of a reasonable error; and
 
the individual rectifies the situation without delay, by transferring out the excess amount or non-resident contribution.
 
Tax fair market value of TFSA prohibited or non-qualified investmentIncome Tax Act s. 207.04, s. 207.06
A tax of 50% of the fair market value of the prohibited or non-qualified investment will be payable by the holder of a TFSA if
 
the TFSA acquires a prohibited or non-qualified investment, or
 
an investment held by the TFSA becomes a prohibited or non-qualified investment.
The 50% tax can be recovered if
 
the property is disposed of by the TFSA before the end of the calendar year following the calendar year in which the tax arose, and
 
it is not reasonable to consider that the TFSA holder knew, or ought to have known, at the time the property was acquired, that it was, or would become, a prohibited or non-qualified investment.
The calculation of the tax payable on non-qualified investments or prohibited investments is made on CRA form RC243 Tax-Free Savings Account (TFSA) Return.
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Tax on investment income in the TFSA
The investment income earned on prohibited investments in the TFSA is subject to income tax equivalent to 150% of the normal federal tax (Part I tax) on that income.  For instance, for a person with a marginal federal tax rate of 22%, the income would be tax at a rate of 33%.
Under amendments included in Bill C-47, which became law in December 2010, after October 16, 2009, any income from prohibited investments will be considered an "advantage" and taxed at a rate of 100% (all the income will be payable as tax).  The previous taxes on income from prohibited investments were repealed.
Prior to these amendments, any income from non-qualified investments was taxed at regular federal/provincial tax rates, but any income from that income (compound income) was not taxed.  The amendments in Bill C-47 also tax income earned on income from non-qualified investments.
Department of Finance information
 
Tax Tip:  Tax-free savings accounts are not always tax-free!
TFSA Asset transfer (swap) transactions
Asset transfer transactions, also known as swap transactions, are transactions where property is transferred out of an account, and cash or other property is transferred into the account.  These transfers, for instance between a TFSA and another registered account such as an RRSP, are not treated as a withdrawal and recontribution, but as a purchase and sale.
\
Amendments to the Income Tax Act which became law (Bill C-47) in December 2010 prohibit asset transfer transactions between registered or non-registered accounts and TFSAs.  The prohibition would apply to transfers between accounts of the same taxpayer or that of the taxpayer and an individual with whom the taxpayer does not deal at arm's length.
The amendments apply tax at a rate of 100% of the amount of the asset transfer transaction, for transactions occurring after October 16, 2009.
Where the asset transfer transaction has occurred inadvertently after October 16, 2009, the Minister of National Revenue may waive or cancel all or part of the tax payable, if the taxpayer promptly rectifies the situation by restoring each account to its position before the asset transfer occurred.
Note:  These rules do not apply to in kind contributions or withdrawals of property to or from a TFSA.  An in kind contribution or withdrawal is different from a swap transaction, because nothing is being transferred (swapped) out of or into the TFSA in return for the contribution or withdrawal.
Department of Finance information
 
Tax Tip:  Swapping investments between a TFSA and other accounts can be costly.
 
 
Tax-free savings accounts (TFSAs) - marital breakdown or divorce
TFSA transfers can be made directly to a former spouse or common-law partner's TFSA without affecting their contribution room, if
 
the individuals are living separate and apart at the time of the transfer, and
 
the transfer is made under a decree, order or judgment of a competent tribunal, or under a written separation agreement
The transfer is not considered a contribution, so does not reduce the contribution room of the recipient.
The transfer is not considered a withdrawal, so will not be added back to the contribution room of the transferor the following year.  The transfer will also not eliminate any excess amount in the TFSA.
Canada Revenue Agency (CRA) information:
 
RC4466 Tax- Free Savings Account (TFSA) Information Sheet - see Chapter 5 Qualifying Transfers - Upon marriage or common-law partnership breakdown
Tax Tip:  Make sure your financial institution knows that this is a marital breakdown transfer, not a withdrawal and deposit.
 
 
Tax-free savings accounts (TFSAs) - death of the TFSA holder
A TFSA holder can name a spouse or common-law partner as the "successor holder" in the TFSA contract.  On the death of the holder, the spouse becomes the new holder, keeping the tax exempt status of the TFSA.  This will not affect the TFSA contribution room of the spouse.
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The Income Tax Act only allows the tax exempt status of the TFSA to be passed on to a spouse or common-law partner.  If some other person is named as a beneficiary of the TFSA, the account will no longer be a TFSA.
Whether or not a beneficiary can be named in a TFSA contract depends on provincial legislation.  By now, most provinces have probably revised their legislation to allow for this.  Check with your financial institution.
Assets with named beneficiaries such as life insurance policies or RRSPs are usually excluded in determining the value of an estate for purposes of probate.  It is likely that a TFSA with a named beneficiary would also be excluded from probate.  Again, this would depend on provincial legislation.  For example, the British Columbia Law and Equity Act S. 49 provides that if, in accordance with the terms of a registered plan (which includes a TFSA), an annuitant designated a person to receive a benefit payable under the plan in the event of the annuitant's death,
(a) the designation is effective if it is in writing and signed by the annuitant, or if it is contained in a will or other testamentary instrument,
(b) the person designated may enforce payment of the benefit, and
(c) the benefit is not part of the estate of the annuitant
Where no successor holder is named for the TFSA, the proceeds of the account will become part of the estate of the deceased.  If a surviving spouse/common-law partner receives proceeds from the TFSA, the proceeds can be used to make an exempt contribution to the survivor's TFSA, and not affect the contribution room of the survivor, as long as
 
it is done before the end of the first calendar year following the holder's death (rollover period), and
 
it is designated as an exempt contribution in the survivor's income tax return for the year the contribution is made.
Where there is no spouse or common-law partner named as the successor holder, the TFSA will not lose its tax-exempt status until the the earlier of
 
the time it ceases to exist (completely paid out to beneficiaries), or
 
end of first calendar year following the holder's death.
Any payments to beneficiaries, including during this exempt period, will be taxable to the beneficiaries, to the extent that the payment includes income or capital gains earned after the death of the holder.
Example:  Holder dies with TFSA valued at $80,000.  By the time the assets are distributed to the beneficiaries, the value has grown to $82,000.  $2,000 will be taxable income to the beneficiaries.
Canada Revenue Agency (CRA) resources:
 
RC4466 Tax- Free Savings Account (TFSA) Information Sheet - see Chapter 6 Death of the TFSA Holder
 
What happens if the account holder passes away? - Frequently asked question #13.
Tax Tip:  If it is possible (provincially regulated), designate your spouse as the successor holder in your TFSA contract, to avoid including the TFSA in assets subject to probate, and to avoid having to change your will.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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