Tax Free Savings Account (TFSA)

Established in 2009 by the Federal Government, it has quickly evolved into an integral part of a well-crafted Financial Plan. Though the yearly amounts of allowable savings are modest, the flexibility, tax free accumulations, withdrawal and redeposit of withdrawn amount, are an invaluable tool in both short-term and long-term savings.

To qualify to have a TFSA you must be over 18 years old, have a valid SIN and effectively be a tax-resident of Canada. In some province or territories, the age at which someone can enter into a contract (which includes opening a TFSA) is 19. In these cases, contribution room from when they turned 18 is carried over into the following year. You can be a non-resident and contribute to a TFSA, however each month you are a non-resident the TFSA is subject to a 1% tax/month of non-resident status. Not the place for discussing “Residence Status”, however, going to Florida for effectively the winter, does not qualify you as a “Non-Resident”. It is a far more complicated process.

Depending upon when you turned 18 years of age, will establish the total amount of TFSA room you have. If you were 18 in 2009, the total of the principal deposits you could have made is $81,500. In the early years there was significant variability in allowable contribution amounts. Future contribution room will be adjusted for inflation and rounded to the nearest $500.

See below:
2009 to 2012 was $5,000
2013 and 2014 was $5,500
2015 was $10,000
2016 to 2018 was $5,500
2019 to 2022 was $6,000
2019 to 2022 was $6,000
2023 is $6,500
2024 $7,000

Starting in 2024 the TFSA annual room limit will be indexed to inflation and rounded
to the nearest $500. (Some good news due to higher inflation).

Contributions to a TFSA are not deductible for income tax purposes. Any amount contributed as well as any income earned in the account (for example, investment income and capital gains) is generally tax-free, even when it is withdrawn. Amounts withdrawn can be re-deposited back into your TFSA on January 1st following the year of withdrawal. CRA keeps a tally of your allowable contribution room. Excess contributions are subject to a 1% penalty/month of the excess amounts.
(Cautionary note: CRA and the reporting on allowable TFSA contributions and available room is notoriously flawed! Financial Institutions do not report the previous years activity until several months after the end of the year. You would not be the first tax-payor who received a nasty surprise with a penalty owed to CRA. KEEP ACCURATE RECORDS OF YOUR DEPOSITS AND WITHDRAWALS IN A CALENDAR YEAR.)

Administrative or other fees in relation to a TFSA and any interest on money borrowed to contribute to a TFSA are not tax-deductible. The payment of investment counsel, transfer, or other fees by a TFSA trust will not result in a distribution (withdrawal) from the TFSA trust.

Beneficiaries and income splitting opportunities are important features of TFSA Accounts. Simply, if you are a spouse or Common-Law partner of an account holder you can be named as a Successor Holder of the TFSA account. Upon the death of the TFSA account holder the Successor Holder affectively jumps into the shoes of the deceased person and the TFSA in whole can be assumed by the Successor Holder in their name. The acquiring of this account does not affect their contribution room. Even if your own TFSA is fully funded, rolling this deceased spouse or common-law partner’s money into you name, effectively increases your TFSA by this amount without penalty. If you are a Named Beneficiary and a spouse or common-law partner, you can transfer assets from their deceased spouse’s TFSA to their own TFSA, as long as this occurs during the ‘rollover period’. You would use Form RC240. This period begins the day of death and ends on December 31st of the following year. Transfers during this rollover period may be deemed to be ‘exempt contributions’ and as such do not affect your TFSA contribution room.

It is worth noting that exempt contributions cannot exceed the fair market value of the deceased’s TFSA at the date of death; therefore, any TFSA growth after the date of death will be taxable. On that basis, it is best to make this transfer as quickly as possible to mitigate taxes.
you have unused TFSA room in your own name, you can roll this money into you TFSA. Doing so effectively claims used amounts in your TFSA’s allowable room.

If you are a Named Beneficiary and not a spouse, your can receive the at date of death value of the TFSA, tax-free, however any gains in the TFSA post date of death are taxable income in your hands. If the named beneficiary has unused TFSA contribution room, they can deposit all or up to the allowable room limit into their TFSA.  Like the above point, timing is crucial and affecting the timely transfer/deposit to avoid unnecessary tax is important. The advantage of designating either a successor holder or beneficiary is that the assets in the TFSA can flow directly to the designated successor or beneficiary without going through the estate. This means potential savings on probate fees.

Lastly, Quebec does recognize Successor Holder or Beneficiary Designations in non-insurance contracts (Banks, Trust Companies, Brokerage Houses), consequently the ability to “roll over” TFSA’s to a beneficiary isn’t available. You can, if you are a spouse or common-law partner, still elect for an “Exempt Contribution” by filing form RC240. If not a spouse, you can if you have contribution room, deposit the proceeds into your TFSA. In both cases, the earnings after the date of death are taxable until such time as these funds have been re-deposited into the receiving TFSA.

Investment options are similar to a RRSP. The Income Tax Act states that you may only hold qualified investments in your TFSA; these can include mutual funds, publicly listed stocks, government bonds, certain corporate bonds, ETFs, GICs, cash and even certain options. Gold and silver coins, bullion and certificates; and Shares of a specified small business corporation.

Prohibited Investments as per the Income Tax Act include: the debt of the holder of a TFSA; a debt, share of, or an interest in, a corporation, trust or partnership in which the holder of the TFSA has a significant interest; a debt, share of, or an interest in a person or partnership with which the holder of the TFSA does not deal at arm’s length; or an interest in or right to acquire any of the above investments.

If you hold a non-qualified investment or if an investment held in your TFSA becomes non-qualified; The amount of the tax is 50% of the fair market value of the investment at the time the event that led to the tax applying occurred.

If you are contemplating an aggressive growth strategy for your TFSA, you must seek out the input of a qualified Tax Lawyer as to the appropriateness of, or assess the tax risk of, a TFSA investment qualifying for inclusion in your TFSA.

Regardless of the foregoing points on qualifying or non-qualifying investments, a TFSA offers some tremendous tax-free investment growth benefits and tax-free income benefits. A TFSA can be a strategic tool in tax and income planning.