Your four-point TFSA checklist

National Post

2015-01-17


While it may feel like you're being bombarded with RRSP ads encouraging you to make your 2014 contribution before the March 2nd deadline, don't forget about that other plan - the tax-free savings account, now in its sixth year. As of Jan. 1, you can sock away another $5,500 for 2015. Here are four TFSA tips that investors often overlook.

1. Contribution room is cumulative For individuals who have yet to open a TFSA, the cumulative total contribution room now stands at $36,500, consisting of $5,000 for calendar years 2009 through 2012 and $5,500 for 2013 through 2015. Of course, this assumes you turned 18 in at least 2009 (or earlier), the minimum age at which you can contribute to a TFSA.

2. Withdrawals can be recontributed Perhaps one of the most confusing rules is how TFSA withdrawals are treated when it comes to figuring out your contribution room.

The rule can be simplified as follows: the total dollar amount of TFSA withdrawals (which can be a mix of original contributions, income and gains on those contributions) gets added to your TFSA contribution room for the following calendar year.

Still confused? Let's say Katy contributed the maximum of $36,500 to her TFSA. On May 1, 2015, when her TFSA is worth $50,000, Katy decides to buy a new car and withdraws the full amount. Katy's TFSA contribution limit for 2016 will therefore be $55,500, consisting of the $50,000 withdrawn in 2015 plus the 2016 annual amount, assumed to be another $5,500.

If Katy were to contribute anything further in 2015, however, she will pay a penalty tax as she will not have the contribution room until next year.

3. Contributions "in-kind" If you don't have the cash lying around to fund your 2015 contribution, don't forget that you can contribute to your TFSA "in-kind" by transferring in securities from your non-registered account.

But keep in mind that if you are contributing a security with an accrued capital gain, a contribution in-kind will give rise to an immediate capital gain.

Unfortunately, the reverse is not true. If you are contributing an asset with an accrued loss to your TFSA, that loss will be denied.

A better strategy would be to dispose of the underwater security first, recognize the capital loss, and contribute the proceeds of sale to your TFSA. Then, if you want to buy back that original security (in the hopes that it will rise), be sure to wait 30 days. If you don't, your capital loss will be disallowed. The "superficial loss" rule in the Tax Act doesn't permit you to claim a capital loss if you buy back the same security, either directly or in your RRSP, RRIF or TFSA, within that 30-day period.

4. You can keep your TFSA if you leave Canada Should you ever leave Canada and become a non-resident, there's no need to close your TFSA. From Canada's perspective, you can keep your TFSA and you won't pay Canadian tax on earnings or growth in the account, nor will you be taxed on withdrawals from your TFSA. Note that you won't generate any new TFSA contribution room for any calendar year throughout which you're a non-resident.

However, any withdrawals made while you're a non-resident will be added back to your TFSA contribution room in the following year (as discussed above) but will only be available to you if you move back to Canada.