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Koroll & Company Blog

A Mid-Year Checkup on Your TFSA

[fa icon="calendar"] Jul 17, 2017 9:37:58 AM / by Allen Koroll

Tax-free savings accounts (TFSAs) have been part of the Canadian tax system now for nearly a decade, and millions of Canadians utilize them as a savings vehicle, whether for short-term or long-term purposes.

Keep your TFSA onside with mid-year planningOf all of the tax-deferral or tax-savings plans available to Canadians, TFSAs undoubtedly provide the greatest flexibility, as the TFSA rules allow taxpayers to both carryover allowable contribution room to future years and to re-contribute amounts withdrawn.

However, that very flexibility (especially the ability to re-contribute previous withdrawals) also has the potential to cause taxpayers to run afoul of the rules by getting into an inadvertent over contribution position, resulting in the imposition of penalty taxes.

A brief recap of the TFSA rules: every Canadian aged 18 years of age and older can contribute a specified annual amount to a TFSA ($5,500 for 2017). Funds contributed to the TFSA are not deductible from income, but investment income earned by those funds is not taxed, either as it accrues or on withdrawal.

Where a taxpayer does not contribute to a TFSA in a particular tax year, the contribution not made can be carried forward and that contribution made in any subsequent year. As well, TFSA holders can withdraw funds from their plan at any time, free of tax, and funds withdrawn can be re-contributed, but not until the following year.

Therefore, each taxpayer’s contribution limit for a particular year is that year’s specified annual amount, plus any allowable contributions not made in previous years and carried forward, plus amounts withdrawn in any previous year but not yet re-contributed.

Where, however, a taxpayer contributes more than maximum allowable contribution during a taxation year, a penalty tax of 1% per month of the excess is imposed. It’s apparent that, especially where there are carryforward amounts and/or there have been withdrawals from a TFSA, calculating one’s current year contribution room can be complex.

At one time the Canada Revenue Agency notified taxpayers of their current year TFSA contribution limit on the annual Notice of Assessment, but that is no longer the case. Now, the easiest way to find out one’s current year contribution limit is by calling the CRA’s Individual Income Tax Enquiries Line at 1-800-959-8281 or its automated Tax Information Phone Service (TIPS) line at 1-800-267-6999.

Taxpayers who have registered for the Agency’s My Account online service can use that service to find the same information. Once the taxpayer knows his or her contribution limit for 2017, it’s time to make sure that current contribution plans for the year will not put the taxpayer in an over contribution position.

Some taxpayers contribute on a regular, often monthly basis, while others are in the habit of depositing regular or irregular or periodic income receipts, like a tax refund or tax benefit amount, into their TFSA.

Either way, after finding out one’s current year contribution limit, it’s necessary to calculate how much has already been contributed in 2017. The difference between those two figures represents the balance which can be contributed before the end of the year without getting into an over contribution position and incurring penalties. And, it’s important to remember that if withdrawals have been or will be made during 2017, those amounts cannot be re-contributed until after the end of this year.

If it’s necessary to adjust regular contributions in order not to go “offside” by the end of the year, the best time to do it is obviously before getting into that over contribution position. As soon as a taxpayer is in an over contribution position, the 1% penalty tax is imposed for that month, even if the excess funds are withdrawn before the end of the month - in other words, as explained in the Canada Revenue Agency guide to TFSAs “[I]f, at any time in a month, you have an excess TFSA amount, you are liable to a tax of 1% on your highest excess TFSA amount in that month.”

Especially where TFSA contributions are set up to occur regularly, by automatic deposit or bank transfer, it’s easy to assume that everything has been taken care of and nothing further needs to be done with respect to such arrangements. However, an “out of sight and out of mind” approach rarely makes for good financial and tax planning, and checking on the status of one’s TFSA on a periodic (at least quarterly) basis can help to ensure that everything is as it should be, and that unnecessary penalties are avoided.


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The information presented is only of a general nature, may omit many details and special rules, is current only as of its published date, and accordingly cannot be regarded as legal or tax advice. Please contact our office for more information on this subject and how it pertains to your specific tax or financial situation.



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Topics: TFSA

Allen Koroll

Written by Allen Koroll