Things you may not know about the Tax-Free Savings Account
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Published on
February 1, 2024
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Differences to the RRSP
A TFSA provides a powerful incentive to save by allowing the investment growth to accumulate each year and be withdrawn tax free. However, unlike a registered retirement savings plan (RRSP), you can’t claim a tax deduction for contributions made to your TFSA and withdrawals are added back to your contribution room for the following year.
TFSA Contribution Limit
Since TFSAs became available in 2009, individuals have been able to make contributions up to a legislative dollar maximum per year. If you don’t contribute the maximum however, not to worry as any unused amounts will carry forward and can be done so indefinitely. As of 2024, maximum contribution room totals $95,000.
Another great feature is if you make a withdrawal from your TFSA of any amount, in the following calendar year that dollar value will then be readded to your allowable contribution room, so you never have to worry about permanent losses in availability.
On the other side, the Income Tax Act imposes a penalty of 1% per month on the highest excess contribution amount at any time during the month. The excess amount can however be simply withdrawn from the TFSA to eliminate the penalty tax for any subsequent months.
Beneficiary vs Successor Holder
If you have a spouse or common law partner, you have the option of naming them as a successor holder or beneficiary on a TFSA. There are some key differences between these structures:
- Listed as a successor holder, the value of the TFSA upon a death claim can be contributed to the spouses TFSA without affecting their CRA contribution limits. This means, if you have maxed out your TFSA with the $95,000 allowable contributions prior to your spouse passing, and they also had contributed $95,000, then a total of $190,000 contributions can be sitting in the survivors TFSA and not be taxed as an overcontribution.
- Listed as a beneficiary, the TFSA value would be paid out upon death claim in cash, just as any other investment or insurance policy would. Only TFSA contributions within the beneficiaries remaining allowable room would then be possible.
It’s often recommended that, where permitted, a successor holder is named over a beneficiary. This set up is not allowed for friends, children, parents etc. However, you still have the option to list beneficiary’s contingent to the successor holder.
U.S. Citizens with a TFSA
U.S. citizens, even those living in Canada, or other U.S. persons (e.g. green card holders) are required to report their worldwide income to the Internal Revenue Service (IRS) each year, including any income earned in their TFSA, as there’s no treaty relief for TFSAs. Whether U.S. taxes will ultimately have to be paid will depend on the particular facts and whether sufficient foreign tax credits are available. Such individuals should speak to a cross-border tax specialist before investing in a TFSA, and often it is not recommended to open a TFSA.
As financial planners, we do not provide specific tax and legal advice. You should always consult your accountant and/or lawyer where necessary. Because of the many ways a strategy may be impacted when segmented, we prefer to communicate collectively with your external professionals to ensure that all recommendations and action plans are in the overall best interest of you, with your professionals working with common goals in mind.
You are never obligated to act on our recommendations of products, services, or advice.