TFSA’s – Beware of Being TAXED

TFSA’s – Beware of Being TAXED

Tax Free Savings Accounts, or TFSA’s as they are better known, is Canada’s newest way to save money without having to pay tax on the interest. Introduced by the federal government January 1, 2009, an individual is allowed to contribute a maximum $5,000 to the account per year. As stated in my first blog, posted March 6, 2011, any open contribution room from previous years can by carried forward indefinitely until you max out the contribution space in your TFSA.

You are allowed withdrawals on the account too. However, there is a catch when it comes to contributions and withdrawals. You are not permitted to contribute more than the allowable contribution room you have in a single year, even if you make withdrawals to keep the balance underneath the allowable contribution room. If you do, you will be taxed. Many Canadians are not aware of this and use their TFSA accounts like it is a regular savings account. They put money in, take it out, put it in, then they take it out again. Not a good idea!

You see, the original intent for TFSA’s was for you to save for your future, most notably for retirement, although it can also be used for a host of other items including buying a house or paying for a trip. Your withdrawals, however, will not be counted into the TFSA until the following year.

Here is what the Canada Revenue Agency (CRA) has to say on this subject:

You cannot contribute more than your TFSA contribution room in a given year, even if you make withdrawals from the account during the year. Withdrawals from the account in the year will be reflected in your contribution room in the following year. If you over-contribute in the year, you will be subject to a tax equal to 1% of the highest excess TFSA amount in the month, for each month you are in an excess contribution position.

Reference: http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/tfsa-celi/cntrbtn-eng.html

Here is an interesting tidbit worth noting: if you feel you were not adequately advised about the use of your TFSA and how it works, you can ask the government for interest relief on your over-contributions. But I recommend you contact your financial advisor to clearly outline how a TFSA works, or go online to the CRA website for TFSA`s for Individuals. Here is the link:

http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/tfsa-celi/menu-eng.html?=slnk

Be careful with the use of your TFSA, avoid paying taxes on excess amounts.

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