Gemma is 41years of age and a Canadian resident. At the start of 2022, her available TFSA contribution room was $6,000.
In February2022, she contributed$5,000 into her TFSA and on September7, 2022,she became a non‑resident. OnJuly12,2023, she contributed an additional$2,500 to her TFSA. By the end of 2023, Gemma was still a non‑resident of Canada, and she had not made any withdrawals from her account.
For 2023, Gemma had to pay a tax on the contribution shemade while she was a non‑resident and she was also subject to tax on the excess TFSA amount in her account.
Gemma’s unused TFSA contribution room at the end of2022 was$1,000 (the TFSA dollar limit of$6,000 less her contribution of$5,000). Gemma was not entitled to the TFSA dollar limit of$6,500 for 2023 since she was a non‑resident throughout that entire year. Gemma’s$2,500 contribution on July12,2023, resulted in an excess TFSA amount in her account at that time of$1,500. This is the amount by which her contribution exceeded her available room.
Gemma’s tax on non‑resident contributions for 2023 was$150 because the full amount of her$2,500 contribution wasmade while she was a non‑resident and it remained in her account until the end of the year. Sincethe tax is equal to 1% per month, the tax on her non‑resident contributions was$150 ($2,500 × 1% × the 6months from July toDecember2023).
Since part of Gemma’s contribution while a non‑resident also created an excess TFSA amount ($1,500, as described above) in her account, she also had to pay the1% tax per month on this amount from July to December2023. Her taxon her excess TFSA amounts was$90($1,500×1%×6months).
For2023, Gemma had to pay a total taxof$240 on her TFSA, made up of$150 in tax on her non‑resident contribution plus$90 in tax on her excess TFSA amount.
Gemma will not accumulate any room in 2023 unless she re‑establishes Canadian residency in that year. She will have to withdraw the entire$2,500 she contributed while she was a non‑resident to avoid an additional tax of 1%per month on the non‑resident contributions aswellas on the$1,500 excess TFSA amount.
This tax, calculated on the full amount of the contribution, will apply for each month that any portion of the amount contributed while a non-resident stays in the TFSA and will continue to apply until whichever of the following happens first:
- the contributions are withdrawn in full from the account and designated as a withdrawal of non-resident contributions
- the individual becomes a resident of Canada
An individual is not subject to the tax of 1% on non-resident contributions for the month in which the full amount of the contribution is withdrawn or, if applicable, the month in which Canadian residency is resumed.
FAQs
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. Administrative or other fees in relation to a TFSA and any interest on money borrowed to contribute to a TFSA are not tax-deductible.
What's the catch with a tax-free savings account? ›
If you're asking “What's the catch?”—well, there isn't one, unless you count the yearly limit for the amount of money you can deposit into the TFSA. Each year, the federal government announces what the annual maximum contribution is; for 2024, it's $7,000, and for 2023, it's $6,500.
What is the downside of a TFSA? ›
No Income-Tax Reduction:
Unfortunately, TFSA contributions can't be used to lower your taxable income. This means there is no way to decrease your income tax when contributing to a TFSA. For high income earners this makes an RRSP more appealing.
What happens to TFSA when you leave Canada? ›
If you hold a TFSA when you leave Canada, you can keep it and continue to benefit from the exemption from Canadian tax on investment income and withdrawals. However, you cannot contribute to your TFSA while you are a non-resident of Canada, and your contribution room will not increase.
Is TFSA reported on tax return? ›
You do not report your TFSA contributions on your tax return. To check your TFSA contribution room, you may use CRA's My Account service online. The TFSA information reflects contributions and withdrawals made up to the date indicated by CRA.
What is the downfall of a TFSA? ›
Holding a volatile investment in a TFSA can be risky for a couple of reasons: First, if a capital loss is realized, that loss cannot be used to reduce other taxable capital gains you may have. Second, only the amount withdrawn can be added back to TFSA contribution limit the following year.
What triggers a TFSA audit? ›
There are some specific examples of when the CRA would ask you to pay tax on income earned inside the TFSA. This includes prohibited and non-qualified investments, for example. should you make a contribution while you are not a resident of Canada, or if your account contributions are in excess of your limit.
Can I take all my money out of my TFSA without penalty? ›
There's no limit on how much you can withdraw from your TFSA. Contrary to popular belief, withdrawing from your TFSA is simple and doesn't incur immediate penalties or taxes. Whether you're cashing in on investments or need quick cash, your TFSA is designed for flexibility.
Can you ever lose money in a TFSA? ›
Yes. The assets in your TFSA are like any other investment, and they can lose value over time. You can actually lose contribution room too.
What is the lifetime limit for TFSA in Canada? ›
It also means that starting on January 1, 2024, eligible Canadians will now have a cumulative lifetime TFSA contribution limit of $95,000 (see “What is the lifetime contribution limit for TFSA?” below for examples and charts).
U.S. stocks held in a TFSA are subject to 15% withholding tax on U.S. dividend income. Withholding tax would apply to other foreign stocks held in a TFSA, with rates starting at 15%, depending on the country. Only Canadian stocks are not subject to withholding tax on their dividends inside a TFSA.
Can I put 50k in my TFSA? ›
Your TFSA lifetime contribution limit is $95,000. Your ongoing contribution amount. There is new contribution room every year. For 2024, you can contribute up to $7000 plus any unused contribution room from previous years.
What is an exempt contribution to a TFSA? ›
Exempt contribution – a contribution made during the rollover period and designated as exempt by the survivor in prescribed form in connection with a payment received from the deceased holder's TFSA.
Can you take money out of TFSA without penalty? ›
Depending on the type of investment held in your TFSA, you can generally withdraw any amount from the TFSA at any time. Withdrawing funds from your TFSA does not reduce the total amount of contributions you have already made for the year.
