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Tax Free Savings Accounts - TFSA

Posted By: Anonymous

By Nizam Shajani, CPA, CA, MBA, Partner

Tax free savings accounts were introduced in 2009 and allowed contributions for each individual over the age of 18 of $5,000 annually for years 2009 through 2012; $5,500 for years 2013 and 2014; $10,000 for year 2015; $5,500 for year 2016; $5,500 for year 2017 and 2018.  Unused contribution room is carried forward and accumulates for future years.  Due to the cumulative nature of this investment vehicle – TFSAs are becoming a larger force to consider in tax planning – with maximum contributions for all years up to 2017 amounting to $57,500 per individual over the age of 18.

You do not get a tax deduction for contributions to a TFSA – however, money put into a TFSA grows tax free and money withdrawn from a TFSA is also tax free.  Attribution rules also do not apply.   

You must be careful when withdrawing from a TFSA as withdrawing funds from your TFSA does not reduce the total amount of contributions you have already made for the year.  If you have maxed out your contributions and then make a withdrawal - you cannot contribute again in the same year without incurring a penalty.  If you are replacing withdrawals, ensure you have contribution room available from previous years.  If you have used up your contribution room, wait until the following calendar year to put the money back in.  The penalty is 1% per year for over contributions. 

If you are unsure of how much you are permitted to invest, you can confirm your contribution room with CRA.  If you have made a withdrawal and you want to put money back in – check to see if you have room from prior years – or wait until the following calendar year.  An estimated 76,000 Canadians got letters on this last year due to withdrawals and re-investments. 

Income earned and withdrawals from a TFSA do not affect eligibility for benefits and credits such as OAS, guaranteed income supplement and the Canada child tax benefit as is the case with RRSP or RRIF withdrawals.  

When selecting your investment in a TFSA - you likely do not want your TFSA to hold investments that hold foreign dividend type of income – as treaties such as the tax treaty between Canada and the US have no withholding tax deducted from those dividends for RRSPs and RRIFs or other retirement income – or allow for foreign tax credits on such investments that have withholding tax in the foreign jurisdiction.  However the withholding tax is paid on investments held in TFSAs (and RESPs) – and you cannot claim an offsetting foreign tax credit because you pay no Canadian tax on TFSAs (or RESPs).  Effective investments for tax purposes within your TFSA would include Canadian interest generating income (although these are not necessarily investments that net you the most return). 

This information is for discussion purposes only and should not be considered professional advice. There is no guarantee or warrant of information on this site and it should be noted that rules and laws change regularly. You should consult a professional before considering implementing or taking any action based on information on this site. Call our team for a consultation before taking any action.

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