tfsa-limit

TFSA Contribution Limit Withdrawals

What is a TFSA?

It is funded using tax-paid money. This means that you do not get any rebate on tax when you contribute to your TFSA. The primary benefit is tax free profits, with no future taxation on withdrawals. This is unlike an RRSP where tax paid is effectively refunded when you contribute, and then tax is later assessed when you withdraw, ideally at a lower rate of tax. The benefit of a TFSA is much more straight-forward – paying no tax on growth is better than paying tax. Extracting and maximizing benefits from an RRSP can be a bit more challenging to manage due to the fact that your tax rate in the future is effectively unknown. This makes contributing to your TFSA an easy choice when you have the room available and aren’t sure if you should be using your RRSP at the time.

The benefit to be obtained from a TFSA is capped by what is known as the “contribution limit”. You may only contribute a certain amount to your TFSA. This means the amount of investments/savings that you can shield from tax is limited by the contribution limit. It is best to maximize your use of this benefit by contributing as much as possible to your TFSA before saving/investing in any taxable accounts.

Who can open a TFSA?

Per the CRA: “Any individual who is 18 years of age or older and who has a valid social insurance number (SIN) is eligible to open a TFSA.”

Source: https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/tax-free-savings-account/who-open-a-tfsa.html

Note that non-residents or those who were previously/will be a non-resident have special rules regarding the calculation of contribution room – refer to this link: https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/rc4466-tax-free-savings-account-tfsa-guide-individuals/tax-free-savings-account-tfsa-guide-individuals.html#P44_1116

TFSA Limit / Withdrawals

Generally the calculation of a particular years contribution limit is as follows:

  • your TFSA dollar limit plus indexation;
  • any unused TFSA contribution room from the previous year; and
  • any withdrawals made from the TFSA in the previous year.

Source: https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/tax-free-savings-account/contributions.html

In effect this means unused room is carried forward, and withdrawals are added back to the next years contribution room. Therefore you’re always free to use the TFSA since if you need the money for some other purpose you can withdraw the funds, use the money, and get the room back for later re-use.

“The TFSA dollar limit plus indexation” is not calculated by you. It is a prescribed number each year (Currently $5,500). You only accumulate TFSA room so long as you are resident, and are older than or will turned 18 during the year. You accumulate this room regardless of whether you have filed an income tax return (unlike the RRSP which requires a tax return filed to calculate the room). Non-residents should look to guidance on the linked TFSA guide above.

Your contribution room is calculated across all accounts – not per TFSA account. You may have multiple TFSA accounts at different institutions, but you must ensure that your total contributions across all accounts is not beyond the limit.

Here are some examples of the TFSA room calculation: https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/tax-free-savings-account/examples-tfsa-contribution-room.html#xmpl2

Investment Types

A TFSA account is any account with the designation as a TFSA account. This means a TFSA goes beyond just “savings accounts”. You can have a TFSA account at a variety of institutions and it can hold cash, mutual funds, stocks (except in some circumstances), bonds, GIC’s, and even (in limited circumstances) small business corporation shares.

Source: https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/rc4466-tax-free-savings-account-tfsa-guide-individuals/tax-free-savings-account-tfsa-guide-individuals.html#P44_1121

Gains/Losses in the TFSA

Gains earned in a TFSA are not subject to taxation. On the other side, losses in your TFSA are denied from being offset against any taxable gains.

Source: https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/rc4466-tax-free-savings-account-tfsa-guide-individuals/tax-free-savings-account-tfsa-guide-individuals.html#losses_incurred

Slips, and reporting your TFSA on your tax return

So long as you have not over-contributed to your TFSA you are not required to report your TFSA contributions, withdrawals, or incomes. You do not need to fill out anything when filing your taxes. Your TFSA information (summary of activity during the year) is submitted by the institution who created the account to the CRA.

How to find your contribution limit

You can find your contribution limit for a particular year at: * CRA My Account; * MyCRA at Mobile apps; * Represent a Client if you have an authorized representative; or * Tax Information Phone Service (TIPS) at 1-800-267-6999.

Source: https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/rc4466-tax-free-savings-account-tfsa-guide-individuals/tax-free-savings-account-tfsa-guide-individuals.html#P44_1120

Your Contribution Limit is updated after each year, but it may take a while after year-end for your contribution limit to be properly updated at the CRA. The CRA needs to wait for all of your institutions to file your information, and then it takes a while for the CRA to update their systems to reflect the new limits.

Generally speaking it is a good idea to track what you would expect your TFSA limit to be to ensure that all institutions have properly filed the activity for the year. Any errors by your institutions are your own responsibility to resolve in order to avoid penalties. You can call the CRA for an activity summary if you need the detail of activity filed with them in order to reconcile your TFSA limit. If you believe there is an issue with what one of your institutions filed then contact that institution – and then contact the CRA if they are unable to help.

Source: https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/rc4466-tax-free-savings-account-tfsa-guide-individuals/tax-free-savings-account-tfsa-guide-individuals.html#p3021_26370

Day Trading in the TFSA

This is nearly impossible to comment on in a wiki article, however it needs to be at least mentioned. The issue with day-trading in your TFSA stems from the following rule – you are prohibited from using the TFSA to shield the incomes of a business activity (as a business is not an eligible investment for a TFSA). In taxation the term “business” has a specific definition that alludes to some general factors to determine what is business activity. Generally speaking passive investing, or investing through a normal adviser, or long-term buy and hold investing, would not be considered a “business activity”. However, frequent (day) trading or highly speculative trading (and the research and other activities that come along with this) ends up being seen by the CRA (and our taxation laws) as a business activity. The CRA is increasingly targeting individuals with high profits/high activity for audits of their TFSA accounts. It is NOT recommended to day trade or keep highly speculative investments in your TFSA. AGAIN, this is FAR from a detailed explanation of the issue.

Effects on Credits

As withdrawals from a TFSA are not considered to be income you can freely withdraw funds from your TFSA without concern for losing certain income based credits such as the WITB/HST/CCB or other amounts.

Source: https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/rc4466-tax-free-savings-account-tfsa-guide-individuals/tax-free-savings-account-tfsa-guide-individuals.html#P44_1117

Foreign funds

Foreign funds be held in a TFSA account (such as US dollars and US dollar denominated investments), but for the purpose of reporting the usage of contribution room/withdrawals the amounts will be converted to Canadian dollars.

Source: https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/rc4466-tax-free-savings-account-tfsa-guide-individuals/tax-free-savings-account-tfsa-guide-individuals.html#p3021_26419

Death of a TFSA Holder

I can only provide a link in this wiki article for this issue: https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/rc4466-tax-free-savings-account-tfsa-guide-individuals/tax-free-savings-account-tfsa-guide-individuals.html#P44_1119

One comment

Leave a Reply