A Tax-Free Savings Account (TFSA) is a registered investment plan that has beneficial tax treatment. A TFSA differs from an RRSP in that the contributions to the TFSA are not deductible, but all of the income earned by investments in a TFSA is not taxable, including when the investments are withdrawn. In an RRSP, contributions are tax deductible and all eventual withdrawals from the RRSP are taxable. A TFSA is more like a savings account whereas an RRSP is a retirement account. Anyone who is 18 years old may open a TFSA.
Your TFSA contribution room grows annually once you are 18 years of age. In 2019, the annual growth in contribution room was $6,000. Amounts can be withdrawn from a TFSA to pay for large purchases without losing that contribution room permanently. To find your TFSA contribution room, you can check you Notice of Assessment, sign in to CRA’s online MyAccount service or call the Tax Information Phone Service (TIPS) at 1-800-267-6999.
The following types of investments are generally permitted to be held in a TFSA:
- mutual funds
- securities listed on a designated stock exchange;
- guaranteed investment certificates (GIC)
- bonds; and
- certain shares of small business corporations
There are significant restrictions on what types of small business corporation shares can be held in a TFSA. If you are considering holding small business corporation shares in a TFSA, you should consult with us to determine if it would meet the requirements of a qualified investment.
While funds can be withdrawn from a TFSA at any point during the year, you would not be able to re-contribute the amount withdrawn until the beginning of the next calendar year. This is important to consider when seeking to transfer a TFSA between different accounts or investment firms as this must be done as a direct transfer to ensure that you do not lose contribution room until the next calendar year or accidently have an over-contribution.
A non-resident of Canada can continue to hold a TFSA but cannot contribute to it while they are non-resident. If a contribution is made by a non-resident there is a penalty tax of 1% per month the contributions remain in the account.
In the event that an individual over-contributes to a TFSA, a tax will be assessed equal to 1% of the over-contribution per month. In certain situations, the CRA may waive this penalty. If you have over-contributed to a TFSA, you should consult with your tax professionals to determine the tax impact, and if the CRA may waive the penalty in your situation.
Investors and their advisors sometimes wish to take advantage of the completely tax-free nature of TFSA plans with aggressive tax planning. If the planning is too aggressive, the Canada Revenue Agency can impose a 100% tax on the “advantage” realized. If you are concerned that a plan being proposed to you may be too aggressive you should contact us to review the plan.
If you have any questions relating to this matter, contact your tax professionals at Wilkinson & Co. LLP.