Ten Basic Facts about Tax Free Savings Accounts (TFSAs)

Tax-Free Savings Account (TFSA) is a new registered general savings vehicle that was introduced in 2008 federal budget that allows Canadians to save money in the account tax-free throughout their lifetime. The income and earnings in the TFSA plan accumulate without any tax implication.  The ten basic facts about eligibility, contribution, withdrawals, effects of marriage breakdown and beneficiary designation of the TFSA plan.

1. Who is eligible to open a TFSA? 

An individual who is 18 years or older and has a Canadian Social Insurance Number is eligible to open a TFSA account. Some provinces and territories have age of majority as age 19 (British Columbia, New Brunswick, Nova Scotia, Newfoundland, Northwest Territories, Yukon and Nunavut) and financial institutions in those provinces may not open a TFSA for individuals who not yet 19 years old. But the contribution room accumulation will start at age 18. There is no limit to number of accounts a holder can open but there is a limit how much a holder can contribute

2. What is the contribution limit and who can contribute?

Contribution limit for TFSA is $5000 each year for 2009 to 2011. But will remain  $5,000 in 2012. The limit for the future years will be increased based on inflation and rounded to nearest $500. 

Anyone with the contribution room can contribute to TFSA without any penalty or interest. Only the account holder can contribute to the TFSA (i.e. no spousal plans similar to RRSP) but an individual can give money to his\her spouse or common law partner for contribution without any attribution rules. TFSA contributions are not tax deductible.

3. How is TFSA contribution room determined?

The TFSA contribution room is made up of:

• TFSA contribution limit for the year ($5,000 per year plus indexation, if applicable);
• any unused TFSA contribution room from the previous year; and
• any withdrawals made from the TFSA in the previous year, excluding qualifying transfers or specified distributions.

Example: Rosa opened in TFSA account in 2009 and contributed $2000 and did not make any contribution in 2010. Her contribution room for 2011 is $13,000 (Carry forward of $3000 from 2009 and $5000 from 2010 and $5000 from the current year).

You can find TFSA contribution room from Notice of Assessment (NOA), calling CRA or by logging in to My Account at CRA. If you have filed tax returns early the NOA may not reflect the correct contribution room and best way find the limit is by calling CRA or logging to My Account.

4. What happens if I have over contribute for the year?

A penalty will be assessed by Canada Revenue Agency (CRA) of 1% per month on your excess contribution

5. What investments can I hold in the TFSA?
• Cash
• Guaranteed Income Deposits
• Bonds
• Mutual funds
• Stocks listed in designated exchange

5. Can I transfer TFSA from financial institution to another without tax implications?

TFSA in one institution can be transferred to another as qualified transfer without any tax implication.

Example:  Edward has a TFSA account with Royal bank and balance of that account $7500 and would like to transfer it to TD bank. He has to go to TD and complete a transfer form requesting the transfer and then TD will request.

7. Can I withdraw from TFSA? 

Funds in the TFSA can be withdrawn without any tax implications and the withdrawal amount will be added to the contribution room of the following year except for certain exceptions.

Example: Hillary contributed maximum to TFSA each year and withdrew $2000 in 2011. Her contribution room for 2012 will be $7500 (contribution room added for replacing the withdrawal $2000 plus contribution room of $5500 for 2012).

8. Will I receive any tax slips from CRA for income or withdrawals?

There will not be any tax slips for income, withdrawal or transfers except some situations.

9. What happens if there is a marriage breakdown or common law partnership?

When there is a breakdown of marriage or common-law partnership, TFSA assets can be transferred from the holder to the spouse or common law partner’s TFSA without affecting either holder’s contribution room. To do this, following conditions must be met:

§         you and your current or former spouse or common-law partner are living separate and apart at the time of the transfer; and

§         you are entitled to receive the amount under a decree, order or judgment of a court, or under a written separation agreement to settle rights arising out of your relationship on or after the breakdown of your relationship

10. Can a beneficiary designated for TFSA?  

Beneficiary can be designated in the plan (except in Quebec) or in the will. If the spouse or common law partner is designated as successor holder then after holder’s death spouse becomes holder of the account without any tax implications and it will not affect spouse or common law partner’s contribution room. The transfer must be made directly between the TFSAs.

Here are the other posts I have written about TFSA:

TFSA and tax slips

Contingent beneficiary for RRSP, RRIF and TFSA

Is inheritance taxable?

What will happen to your TFSA when you die?

When TFSA was launched in January 2009, most of the provinces did not have legislation in place to designate a beneficiary in the plan. But now all the provinces except Quebec have the legislation designate a beneficiary in the plan.

Call your TFSA provider and ensure you have the beneficiary designation in the plan. If not your estate will be the beneficiary and those assets will be part of probate fees calculation.

Who can be your beneficiary?

• You can designate your spouse or common-law partner as your successor holder in plan or in the will. The plan or will should clearly say that you are designating your spouse or common-law partner as successor holder. This is means if you die the spouse or common-law partner will become holder of the TFSA and the assets can remain in the TFSA without any tax implications to your spouse or common-law partner. This will not affect your spouse or common-law partner’s contribution room either.

Example A

Gill opened a TFSA account on Jan 15 2010 and contributed $7500. She designated her spouse John as successor holder and she died on Mar 7th 2010 and on that date the plan value is $8250. When John provides all the required documentation to the TFSA provider, they will change the name of the account to his name. The amount will not be taxable to John and it will not affect his contribution room.

• You can designate any one as beneficiary and proceeds will be paid to the beneficiary. There will not be any tax implications to the beneficiary up to the date of death value and if the beneficiary wants to contribute to TFSA, he \she has to use her contribution room (except for spouse or common-law partner)

Example B

Gill opened a TFSA account on Jan 15 2010 and contributed $7500. She designated her sister Eva as beneficiary and Gill died on Mar 7th 2010 and on that date; the plan value is $8250. Eva provided all the required documentation to the TFSA provider on May 1st 2010 and on that day; the plan value is $8400. Eva will receive $8400 from TFSA provider and if she wants to contribute TFSA, she has to make sure she has contribution room available. It will be considered as a new contribution. She will also receive a T4A tax slip from the TFSA provider for $150 (post death increase $8400-$8250).

Example C

Gill opened a TFSA account on Jan 15 2010 and contributed $7500. She designated her spouse John as beneficiary and Gill died on Mar 7th 2010 and on that date; the plan value is $8250. John provided all the required documentation to the TFSA provider on May 1st 2010 and on that day; plan value is $8400. John will receive $8400 from the TFSA provider and he can contribute $8400 to his TFSA without affecting his contribution room. In order to achieve this, he has to make the contribution to his TFSA is done before the end of the year following the year of death (i.e. Dec 31st 2011) and file RC240 form with CRA within 30 days of making the contribution. John will also receive a T4A tax slip from TFSA provider for post death income.

Example D

Gill opened a TFSA account on Jan 15 2010 and contributed $7500. She did not have a beneficiary designation in the plan or in the will for her TFSA. Gill died on Mar 7th 2010 and on that date; the plan value is $8250. As she did not have any beneficiary designation, her estate is the beneficiary of the TFSA plan. Her executor Paul provided all the required documentation to TFSA provider on May 1st 2010 and on that day; the plan value is $8400. Estate will receive $8400 from the TFSA provider and estate will also receive a T4A tax slip from TFSA provider for $150 (post death income). The proceeds of $8400 will be included in probate fee calculation.

Here is the CRA link regarding TFSA.