Tax Free Savings Account (TFSA) Refresher

by Mike Holman

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I was talking with my Dad recently about money stuff (he’s a big investment nut as well) and he suggested writing about the TFSA again since it is going to be effective fairly shortly (Jan 1, 2009).  A rather timely and excellent idea so here it is!

What is the TFSA?

A type of investment account where you make contributions but don’t get any tax refund. While the money is in the account there are no taxes applied to any kind of earnings such as interest, dividends, capitals gains. Any withdrawals from the account are not taxable and won’t count against any government programs ie GIS, OAS.

What are the TFSA rules?

  • You can contribute $5000 per year to this account for the years 2009 to 2012 and $5,500 for year 2013 and beyond.
  • The contribution room is carried forward.
  • No taxes on any earnings.
  • No taxes on any withdrawals.
  • When you withdraw money from the account, the contribution room available gets increased by the amount of the withdrawal.  Keep in mind that when you do a withdrawal, the new contribution room only gets added for the following year so you can’t keep withdrawing and contributing during the same year.
  • You can transfer between financial institutions – this will work the same way as transferring your RRSP – there will be no effect on your contribution room.
  • Similar to an RRSP, you can have multiple TFSA accounts.
  • The TFSA annual limit will be indexed to inflation.  However, it will only be increased in $500 intervals so the cumulative inflation number (over several years) has to be 10% before the limit will be increased to $5500.
  • You can withdraw money from the TFSA and transfer it to a non-registered account or RRSP.

When did the TFSA start?

2009.

You can set up a TFSA account starting Dec 1, 2008 and the first deposit can occur on Jan 1, 2009.  There are a number of banks offering to ‘pre-enroll’ you in a TFSA or even ING which will give you a bonus to pay for your taxable interest for the remainder of the year.  While there is nothing wrong with opening an account early, with the exception of the ING offer, there is no real benefit to you as well.

More information on the TFSA start year.

TFSA benefits

Any money that you might be saving for emergencies or upcoming large purchases will have a constant tax drag in an non-registered account. With the TFSA, this tax drag no longer exists so you will end up with more money for your purchase or emergency.  This is the biggest benefit to the TFSA in my mind.

Another significant benefit is retirement planning – while the TFSA is not as good as the RRSP for most people, it is much better than a non-registered taxable account.

More information on the TFSA

Benefits of the Canadian tax free savings account

Tax Free Savings Account (TFSA) Basic information for Canadians

TFSA Over-Contribution Penalty – How To Fix

 

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{ 41 comments… read them below or add one }

1 Squawkfox

The banks have been sending me lots of information on the TFSA. I only wish this kind of investment was available years ago. :)

2 Four Pillars

It is overdue.

3 fersure

I’m debating on what instruments I am going to use, particularly at the outset. On the “safety and savings” hand, I am thinking of buying XCB – ishares corporate bond fund or a corporate bond mutual fund. XCB generally has outperformed bank mutual funds, the problem is that I’d be charged with a high commission of $19…thereby eroding two-months worth of interest if a held cash.

On the “shoot for the stars” hand: do you put all your money in one high risk, high reward miner/driller and hope for a double in order to maximize your contribution room ASAP? A homerun would significantly increase your contribution room: you could sell, keep $5000 in tax free play money and then move to safety. The downside of course is that your stock could crash, without the safety of a capital loss write-off.

Here are some unreported/underreported issues with the new TSFA…at least at the start with the $5000 max contribution level.

1) Fees and Commissions: most on-line brokers and banks charge an “administration fee” of $50-$100 for accounts under $5000. The “fee waiver level” for these accounts therefore wouldn’t occur until year 3: assuming you didn’t lose money on your investments. Which banks/brokers are going to try to sneak in these fees.

2) Trading commissions: I much rather buy an etf over a mutual fund in the same space. While many on-line brokers offer commission free purchases of mutual funds, I have shell out $19 to buy an etf…(double or triple if I want some diversification). In the first few years, trading commissions could quickly erode and savings benefits.
3) De-registration fees: If you want to de-register or partially dereigister an rrsp (to take advantage of the homebuyers plan) you have to shell out $75-$100. The TFSA are being sold as something you can easily take money in and out of when it is likely the banks will impose significant penalties for trying to move your money around.

4 Four Pillars

fersure – good points about fees being charged on TFSA accounts. I would assume that whatever fees are being charge on open accounts would also apply to TFSA accounts.
As for $19 for trades? Don’t complain – just move to Questrade.

5 Alex

I already opened up this account at ING, but you say that you can have TFSA at multiple banks? Just so I understand, can each TFSA account have up to $5,000 in it and not be taxed? I’m a bit confused.

6 Four Pillars

Alex – you have as many TFSA accounts as you want but your TOTAL contribution room each year is $5,000.

For example you can set up 5 TFSA accounts and contribute $1,000 to each account.

7 Mark

Question – I have already put $5000 in @ ING Direct but I also have an account at PC Financial. If I took out $600 from my ING account and put it into my PC what would happen at tax time? I really only put $5000 total but $600 of that was taken from my instution and moved to the other.

8 Four Pillars

Mark if your PC account is a TFSA as well then you will be looking at a tax penalty.

The rule is $5,000 in gross contributions per year. If you have already contributed $5k and then withdraw $600, then that $600 only gets added to your contribution room in the following year.

9 Saravanan

What if I close my TFSA account of 5000 CAD & open a new TFTA account this year? Will I incur any tax penalty this year?

10 Four Pillars

Saravana – yes you will pay 1% per month on the extra contributions.

11 Saravanan

Thanks for the info.
1) It’s hardly a month since TFSA came into existence. So hardly any interest would been accumulated for 1 month.So why will a penalty be incurred if the account is closed & new account is opened?

2) What if I transfer my TFSA account of Bank 1 to TFTA account of Bank2. Is this possible? Will I still incur a penalty?

12 Four Pillars

Saravanan – I’ll answer in reverse order.

#2 – Yes, you can do a transfer of your TFSA from one institution to the other – in that case the transfer-out side will not count as a withdrawal and the transfer-in won’t count as a contribution. Be careful of transfer fees however – these will be charged by the “from” institution.

#1 – This rule is in place to prevent people from over-contributing to their TFSA at the beginning of the year and then withdrawing enough at the end of the year to get them within their contribution limit. Ie I could deposit $100k on Jan 2 and then withdraw $95k on Dec 31 – if you only counted contributions as the net of contributions and withdrawals – then I would have gotten tax sheltering for $95k for most of the year.

13 Saravanan

Thanks for the info. I think transfering existing TFSA to another institution seems to the best option. Yes will take care of transfer fees as well.

I appreciate your selfless service in enlightening people.Thanks once again.

14 Ashford PEDWELL

Can I withdraw $10,000 which is already contributed in 2010, pay off mortgage by that $amount and then borrow to “replenish” the $10,000 to the TFSA. The rules say: to borrow to “contribute”…I’m technically NOT doing that! Thus borrowing to invest gives me that tax deduction and of course, the TFSA is tax free….WIN, WIN, WIN

15 stephen

is the moderator still watching this and answering questions??

16 Sandra C

Hi,

Ive been reading the comments and have a similar or same question but would like clarification. 1.) Will I get taxed if I transfer 5000$ TFSA to another bank?
2.) If I earned 5$ from my TFSA over the month, and were to transfer $5005 (which $5000 is my maximum this year) to another bank, will I still be taxed?

17 Mike

Hi Sandra.

1) If you do a proper transfer to another bank then you won’t get taxed.
2) Transfer amounts have nothing to do with the contribution limits so no.

Don’t do a withdrawal from one bank and then a deposit to another bank – this is not a transfer.

18 David

HI
What If I contribute 10000$ then after a year when I have 10000$ + interest withdraw my 10000$ + 5000$(for 2011)and transfer it elsewhere. Basically I will have two TFSAs
one with interest and another with my 15000$ of the new contributions. Will they penalize me ?

19 Mike Holman

@David – No.

20 Mark

Regarding point number #5 under ‘what are the TFSA rules?’

So the TFSA recognizes any withdrawls as being from the principal, not the interest then?

21 Mike

Hi Mark. I’m not clear what you are asking.

22 Mark

Hi Mike,
I mistakenly withdrew money from my TFSA in May last year ($2000) and put it into a savings account before I knew that this was not allowed. When I discovered that there is a penalty for this, I put the money back into the TFSA in August. Should I have not put the money back in? What will I penalized?

Thanks,
Mark

23 Mike Holman

@Mark – You are allowed to take money out of your TFSA at any time and put it anywhere you want.

As for recontributing – did that new contribution put you over your TFSA limit? If yes, you will be penalized.

The penalty is listed here: http://www.moneysmartsblog.com/tfsa-over-contribution-penalty-fix/

24 Dallas

Here’s my question:

If I was to open three separate TFSA accounts, each in a different bank, can I contribute $5000 to each, all in the same year?

25 Tara

Can I transfer money from my TFSA into my RRSP, or will I be penalized?

26 Mark

Hi Mike,
My wife has a very low income (student). I have no contribution room left in my RSP this year. Should I give her money to put into her RSP? Will that save us taxes? Or would she be better off putting cash into a TFSA?

thanks,
Mark

27 Mike Holman

Hi Mark – you aren’t allowed to give her money to contribute to an RRSP. Plus, if her income is low – RRSP isn’t a good idea anyway, since there is very little benefit.

You can give her money to put into a TFSA – this is a much better idea.

28 Minnie

Hi Mike,

In reading websites and posts regarding the confusions of withdrawing and depositing the same amount, I finally understand about over contributions. My question however is, if I were to withdraw 15K in 2011, can I contribute back that same 15K in 2012 plus an addition 5K as we’re entitled to 20K by 2012? Or will this all be considered over contribution? Simply, do we have to wait until the next year to contribute back what we withdraw?

Many many thanks. This website is of great help!

29 Mike Holman

@Minnie – Your first example is correct. Whatever amount you withdraw in 2011 will be added to your 2012 contribution room.

For example, if you have $16,500 in your TFSA right now and no available contribution room. You withdraw all $16,500 in 2011.

In 2012, you will have $16,500 (amount withdrawn in 2011) + $5,000 (2012 contribution amount) = $21,500 of contribution amount available in 2012.

30 Eclectic Investor

@Ashford PEDWELL:

If I’m reading correctly, the idea is to withdraw $10K, payoff the mortgage, borrow $10K, contribute in the same year the borrowed $10K to the TFSA and use the interest as a tax writeoff.

This won’t work as CRA looks at TFSA contributions only – whether it is new or a replacement of what used to be there, it is still a contribution.
http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns206-236/221/menu-eng.html

As well, there will likely be over-contribution penalties on the TFSA as withdrawals this year can’t be put back until *next* year.

What would work is to borrow to invest in eligible investments that pay dividends. The dividends could be contributed to the TFSA. This would fund part of the TFSA contributions and keep the interest for the investments tax deducible – assuming the rules are followed properly.

Cheers

31 Bill

Hello Mike
I’m new immigrant here.
I arrived the 2010 November.
I know we can put 5k per year.
But the definition of the year is not clear.
Now it’s 2012 January.
May i know how many i can put in the TFSA please?
10k or 15k

32 Eclectic Investor

@ fersure:

Re: TFSA account and commission fees
Mike has a good point about using Questrade for cheaper costs.

However, if you have enough assets already with a brokerage, linking the accounts may give enough to qualify for cheaper commissions and waive the fees. In my case, by the time the TFSA was setup, I have enough assets by counting both my taxable and RRSP accounts that there was no TFSA fee and the $9.99 commission applied across all accounts. It’s always worthwhile to check all of the choices before making a decision.

Re: RRSP de-register fee of $75-$100 to use Home Buyers Plan
Hmm … are you sure about this? When I withdrew from my RRSP for the HBP, nothing was charged and de-registration wasn’t needed. It’s been a while so maybe this depends on the financial institution or is a recent change.

Re: … banks will impose penalties for moving TFSA money …
I guess it will depend on the bank or brokerage account that was setup. In three years, for my two TFSAs I’ve made three bank withdrawals and two brokerage withdrawals, with no fees charged. I’ve never completely emptied an account or done a transfer to another bank/brokerage – it’s always been a cash transfer.

Cheers

33 Howard Hare

I have a son who is Non Residant of Canada, pays No Taxes to Canada so I assume He cannot have a TFSA set up for the day of his future return??

My other question is as to whether He can only build contribution room from the day He arrives back??

A sizeable inheritance is coming to him and putting some of the money in a TFSA would be great, but I am guessing this is a No Go?

34 matt g

Hello, i have some questions about the TFSA’s contribution limit as well as the way the interest works. I’m young and new to investing so sorry if this is an annoyingly stupid question.

it says. “interest is payable monthly at the rates per annum, as offered. Interest for each tier is paid on your daily closing balance.”

I’m not sure if I’m interpreting this correctly, does it mean :
“interest is calculated at the end of each day based on your account balance. this amount is added to a pool. The pool is added to your account at the end of the month.”

My second question is:
“does interest earned each month count towards your contribution limit for the year?”

Thanks for listening.

35 Eclectic Investor

@ matt g:

In the order asked, the first question in interest.

My understanding is that the interest is calculated daily, based on the closing balance for that day. This is a bookkeeping calculation – there is no need for a pool. At the end of the month, the final figure is added to your account – which is another bookkeeping entry. The institution has to have assets/cash behind the scenes because you could ask for the cash, whenever the investments allows (ex. savings account – any day, GIC that comes due in 5 years – the due date).

As for interest in a TFSA counting towards the TFSA contribution limit, the answer is no.

What counts for the TFSA contribution limit is a:
a) contribution, which reduces the available TFSA contribution limit.
b) withdrawal, which adds the withdrawal amount *in the following year*, for an increase.
c) Jan 1st of a new year, where the gov’t grants another $5K, which is another increase.

Whatever happens within the TFSA, does not affect the limit directly. As someone on another board put it … “what happens in the TFSA, stays in the TFSA”.

Cheers

36 Thess

Hi. If I did not contribute anthing to my TFSA in 2011, does that put my contribution limit for 2012 at $10,000? Thanks a lot.

37 Eclectic Investor

@ Howard Hare:

The way I read the “Non-Residents” section of the CRA web link below, it appears that there are a couple of factors.

The first is that if your son didn’t open a TFSA before becoming a non-resident, he can’t open one now. The second is that while he is a non-resident of Canada, no contribution room will accumulate.
http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/tfsa-celi/lgbl-eng.html

When he is a resident again, both a TFSA can be opened, contribution room will start to be available and contributions can be made.

As always, I’m not an expert so make sure to check with CRA or get an expert’s help.

Cheers

38 Eclectic Investor

@ Thess:

Assuming you turned 18 in 2011, are a Canadian resident for both years and have made no TFSA contributions – your TFSA contribution room will be 2 times $5K, which totals $10k.

If you were 18 in 2009 or earlier and a Canadian resident, you may have an additional $10K ($5K x 2009 and 2010) – depending on whether you made any TFSA contributions in 2009 and/or 2010.

Note that contributions will reduce the TFSA contribution room and withdrawals will increase the TFSA contribution room *the next year*. People tend to miss the “next year” part of withdrawals.

Cheers

39 Janet

If l withdraw my contribution and interst earned in dec 2012 at one bank, say in the amount of 5200. And then recontribute in 2013 to an existing Tfsa valued currently at 15000 plus interest,does that mean i can put in the whole 5200 in plus the new value of 5500 in 2013? Not sure if the cra sees the tfsa as at the total contribution of 20000 in 2012 and my withdrawal as coming off this entire amount.

40 Austin

Hi Mike, I have a TFSA as well as a RRSP a/c at Questrade. Now as Tax Time approaches, I transferred all my Stocks from my TFSA to the RRSP BEFORE Dec/31. Two Questions:
1) My Stock transfers to RRSP will count to my RRSP Contributions, &
2) I can re-deposit that same amount + the 2013 Limit to TFSA this year?

Thanks, Austin

41 chander

I have been using TFSA since 2009. I have contributed and withdrawn funds from it.

CCRA do send my RRSP contribution room for the following year in the notice of assessment but doesn’t seem to do so for TFSA.

How can I know my current contribution limit of TFSA which takes into account my previous withdrawals?

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