Tax-Free Savings Accounts: contribution room, penalties, when to withdraw, etc. There’s lots of relevant information to know about TFSAs!
Each taxpayer can contribute, cumulatively, up to $5,000 to a Tax-Free Savings Account(TFSA) each year for 2009 to 2012, $5,500 each year for 2013 and 2014 and 2016 to 2018, $10,000 for 2015 and $6,000 for 2019. Income earned on TFSA funds is tax-free.
If you were at least 18 years old in 2009 when the TFSA was introduced (i.e. born in 1991 or earlier), and have been a resident of Canada since 2009, you have a total of $63,500 in contribution room. It’s worth putting that money into a TFSA, where it will earn income tax-free, even if you withdraw the proceeds and spend them.
Each taxpayer has the same contribution limit, so you and your spouse can both contribute the maximum amount.
Contributions to a TFSA are not tax-deductible, but the income earned in the account is tax-free and you can withdraw the funds at any time (subject to the restrictions attached to your investments – for example, if you purchased a two-year GIC, you may have to wait two years to access your funds, or pay the bank an early withdrawal penalty).
If you have investments that earn taxable interest or dividends, be sure to maximize your TFSA contributions.
3 tips and pitfalls to consider ON SAVINGS ACCOUNTS
1. You can withdraw funds from your TFSA at any time, but you have to wait until the following year to replace themIf you don’t, the funds you replace will be subject to a penalty tax of 1% per month.
Example: Suppose you have already paid the maximum amount in February 2019. In March 2019, you need money and withdraw $3,000. If you replace any part of this $3,000 by contributing a new amount to the TFSA later in 2019, you will have to pay the penalty tax. You must wait until January 2020 to replace the $3,000. (Once in January 2020, you’ll also have an additional contribution limit of at least $6,000 for 2020).
2. The ITA contains “attribution” rules designed to prevent income splitting that could reduce taxes. For example, if you give or lend money or other property to your spouse, the income generated by that money or property is generally “attributed” to you, and taxed in your hands rather than those of your spouse. However, income earned in a TFSA is not subject to attribution rules.
Example: You earn $150,000 a year, and your spouse has no income and no TFSA. If you give your spouse $10,000 to invest in shares paying a 4% dividend, the resulting income of $400 will be taxed in your hands at the high marginal rate. However, if the $10,000 is contributed to your spouse’s TFSA and the fund purchases the shares, the $400 income is tax-free. (However, attribution rules will begin to apply if your spouse withdraws the funds or shares from the TFSA and the funds or shares continue to generate income).
3. ATTENTION! If you’re thinking of juggling your TFSA funds for undue tax savings, think again. The rules governing TFSAs, which are designed to identify such suspicious transactions, have been tightened in recent years. Swaps between TFSA and other accounts, deliberate over-contributions, investment in non-qualified investments (e.g. own business) whose aim is to generate substantial tax-free dividends: these “planning” mechanisms are identified and, in most cases, subject to 100% tax, which produces the opposite of the desired effect. Don’t believe anyone who offers to “help” you use your TFSA (or RRSP) to access tax-free funds, unless you’ve had the scenario reviewed and approved by a lawyer or chartered professional accountant who specializes in taxation.
Would you like the support of an expert to help you see things more clearly? Don’t hesitate to contact one of our tax professionals!
