Over the last few weeks I have received a number of question about the Tax Free Savings Account (TFSA). Below is a number of “quick questions” I have answered lately.
Qualified Investments & TFSA
Question: I am being told by my investment broker that because the stock I own is on the CNSX exchange , it is therefore not eligible to transfer “in kind” to a tax free savings account,
Why is the CNSX ineligible?
Note: This e-mail was sent to us January 5, 2009.
Only shares listed on a designated exchange are allowed in a TFSA. The list of designated stock exchanges is listed in the Income Tax Regulations. The legislation that added the TFSA to the Income Tax Act was only approved in late 2008. As a result some of the regulations, policies and procedures around the TFSA will take some time to be implemented.
However, there was a news release January 5th, 2009 from the Minister of Finance announcing the CNSX has been added as a designated stock exchange allowing securities listed on the CNSX to be eligible for registered accounts such as RRSPs and TFSAs.
Click here for the link to the news release.
How Does TFSA Contribution Room Work?
Question: If a person, who turned 18 in 2008, does NOT set up a TFSA now and waits several years before opening a TFSA. Does that person LOSE the benefit of contribution room” for tax years BEFORE (s)he opened a TFSA?
Your TFSA contribution room accumulates from the year in which you turn 18. There is no need to open an account to save the contribution room.
Transfer of Investments To TFSA
Question: If I open a TFSA today, and put nothing into the account for the next 20 years. At this time I decide to sell some stock I have already owned before opening the TFSA, I can draw out $100,000 of stock I just sold through my TFSA tax free?
You do not have to open a TFSA to generate contribution room. You automatically receive $5,000 of room this year and $5,000 each subsequent year (indexed to inflation). In 20 years you would be able to put over $100,000 in to the TFSA.
Shares must be purchased in the TFSA in order to benefit from the tax free growth. In your scenario, when you move the shares to the TFSA the CRA considers you to have sold the shares for their fair market value (FMV) and your TFSA to have bought the shares at FMV. This means you will have a taxable capital gain when you transfer the shares to the TFSA.
In Kind Transfers to TFSA
One question we receive frequently is how to contribute investments from non-registered accounts in kind to the TFSA.
If you contribute investments “in-kind” to a TFSA you are considered to have sold the investment for its fair market value. If there is a capital gain, you will be taxed on the gain. However, if there is a loss the loss is denied and you cannot apply it against capital gains.
Similarly, if you sell your investment and there is a capital loss and then you repurchase the same investment in your TFSA within 30 days of the sale, your loss will be denied and it cannot be used. You can wait 31 days before repurchasing the investment.
Share Your Thoughts
Do you have a question about the TFSA? Ask your question by leaving a comment.
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{ 41 comments… read them below or add one }
Who’s right, you or Mark Krygier from TD in regards to realizing your capital loss on investments you plan to transfer into your TFSA by simply selling them for cash first, and then transfering that money into the TFSA and buying the same stock on the *exact same day*, not waiting the 30 days, as he states explicitly on this video on Wealthy Boomer: http://canwest.a.mms.mavenapps.net/mms/rt/1/site/canwest-nationalpost-pub01-live/current/launch.html?maven_playerId=_newwealthyboomer&maven_referralPlaylistId=5eb92d985fd7c091d2d67b563a5905ed66602cee&maven_referralObject=3458379
A few years ago the superficial loss rules were changed to prevent people from selling securities at a loss and contributing the cash to an RRSP and buying the same security.
Prior to the change you could technically sell for cash, contribute the cast to an RRSP and repurchase the security and use any losses in the transaction. The CRA had stated however, that the general anti avoidance rule (GAAR) may apply and deny the loss anyway.
The superficial loss rule denies the loss if the taxpayer or a person affiliated with the taxpayer repurchases the security within 30 days. The amendment to the law in 2005 changed the meaning of affiliated person to include a taxpayer and a trust that they have a majority interest in. Since RRSPs, RRIFs, and the TFSA are trusts the superficial loss rules apply.
The sections of the act via the Minister of Justice website are as follows: S.54 “Superficial Loss, S.241(1)(g) “Affiliated Personas” and 146.2 “TFSA”.
I hope this helps!
Jamie Golombek has written about the topic on The Wealthy Boomer as well and his remarks are consistent with mine. http://www.financialpost.com/money/wealthyboomer/story.html?id=0ce0eb71-25ee-4afd-acd9-3050dd4ab867.
One other point I should make is that Mark Krygier is a portfolio manager and not an income tax professional.
Thanks. I guess this is why TDW is known for their discount brokerage and not their full service capabilities.
If my husband and I own a Joint Account then we each move $5000.00 to a TFSA, we were told by three separate fund companies we had to move the funds to an individual account then to a TFSA. No one can provide the ‘reason’ behind this. Would this be a scam or is it true?
Belinda
Technically that is correct. Only an individual may contribute to a TFSA. When payments come from a joint account, it is not possible to prove the contribution was individual.
Some financial institutions may take payments from joint accounts while others will not.
2 questions
if i bought american stocks in my tfsa i assume i still get taxed on the dividends 15 percent witholding tax.How about if i sold that american stock , do i get a 15 percent witholding tax again if i sold for a profit?
next question is about gift giving . Can a Mother give her son 5000 dollars as a gift an in turn put that into a tfsa and not have to show the 5000 as income?I heard you can give gifts up to 12000 without having to show it.
also can someone transfer their stock in a company from their tfsa to my tfsa as long as it meets the max contributions allowed?
There is no withholding tax on the sale of investments inside a TFSA or regular accounts. Also, under the Canada-U.S. Tax Treaty, there is no withholding tax on dividends.
There are also no limit on gifts in Canada. If you gift to an adult child, the gift is not income to the receiver. Also there is no attribution of tax to the giftor with the TFSA. There are attribution issues when you gift to a minor child or your spouse and you should have a read through of my article on income splitting as will as the related articles at the bottom.
If a gift of cash is made to an adult child, there is no tax consequences or limits on the gift. The funds could be placed in a TFSA without issue.
In terms of the stock transfer from one TFSA to someone else’s, the stock must be withdrawn from the other person’s TFSA and given to you. You can then deposit the shares. Although you would have to re-register them in your name.
i called etrade .On american equities within the tfsa in ontario you pay 15 percent witholding on dividends but on profit if you sell the stock.something to think about .Best case scenario would be to find paying canadian dividend stock .rrsp versus tfsa what would be better if i wanted to help live of the dividends not touching the principal? i will be putting in 5000 a year in my tfsa and after 10 years and then taking out dividend money minus 15 percent witholding or rrsp 5000 a year tax free on american equities and then take out the dividends after 10 years every year would be hit 10 percent plus basically another 10 percent for against my income . So it’s like 20 percent when it comes time to spend the dividends.I need to figure out a calculation of how long will the advantage of getting back money for rrsp contributions and tax free american dividends go away once i’m actually spending the dividends on a yearly basis. I wouldn’t think very long .Even though i could contribute more and the compounding of the american dividends would grow the rrsp substantially more after 10 years when i start needing to spend the dividends to supplement my living expenses for another 30 years that all the gains of the rrsp will be long gone.
i meant to say but not on the profit of an american equity .just the dividends
@ Joe
Under the Canada-U.S. Income Tax Treaty, withholding tax is applied to all dividends received from the U.S. at 15% if you disclose to your broker that you are a resident of Canada. There is no dividends on interest from U.S. bonds and debentures, and capital gains a re not subject to withholding under treaty.
If you own a U.S. dividends paying stock inside a TFSA, the withholding applies and you cannot claim it as a foreign tax credit or deduction on your tax return. However, if you make more than $10,000 the withholding is still less tax than you’d pay by including that some amount in income (combined federal/provincial tax at the lowest bracket is 21.05%).
The RRSP vs. TFSA question should be which account should be used first. Most Canadians should maximize their RRSP first and then use the TFSA. Since withholding does not apply to interest and dividends inside an RRSP, it would make logical sense to hold any U.S. securities in the RRSP and Canadian securities in the TFSA.
i’m 34 and i just think that even if you lose 1 percent of a us dividend yield in a tfsa compared to not losing that 1 percent on a us dividend yield in a rrsp after 10 years of the us dividend compounding annually plus getting money back from making the rrsp contribution to be used in more us stock dividend paying companies that after a 10 year period you may have more in an rrsp compared if you did that exact same scenario with the tfsa but now if i wanted to supplement my living expenses at that point now the rrsp dividends if you take under 5000 get taxed 10 percent than basically for me another 10 percent on my income . so at this point i’m losing 20 percent of those dividends a year.WIth the tfsa i would be losing 15 percent annually . How would i caculate that 5 percent difference less annually for the tfsa to the point that the extra money earned in the rrsp evens out and then becomes less the tfsa?
Ideally your right about finding a canadian dividend paying stock and put that in the tfsa but i still think if i choice an american stock that paid a 5 percent dividend and had that in my tfsa versus having it in my rrsp when it becomes time to use that dividend (not the principal)as an income supplement that it would take long even losing 15 percent on witholding every year compared to 20 percent .
it get confusing with calculating the dividends compounding on top of compounding year on year.
i know rrsp in this case would yield greater amount after 10 years but do you think those gains would be lost quickly when its time to take out those dividends annually?
meant to say that it wouldn”t take long even losing 15 percent on
First, you are not getting an additional tax on income but rather are subject to a lesser tax on income because it’s subject to a foreign government’s withholding tax but not Canadian tax.
Let’s look at a real world example. You have $5,000 in a TFSA in US securities that pay you annual dividends $50. All amounts re in Canadian dollars. The divined is subject to a15% foreign withholding tax and your marginal rate on income is 30%.
Inside the TFA you get $42.50 which is the $50 dividends less $7.50 foreign tax.
Outside the TFSA you are taxed at 30%. Since you get a foreign tax credit for the withholding tax, it is irrelevant and your after tax return on the dividend is $35.00.
Which is better? Investing in the TFSA or outside? Obviously it’s the TFSA.
An RRSP would not be subject to withholding tax at all and is the best choice for this security.
At the end of the day you must decide first what will be in your portfolio. Then decide which accounts to put them in.
Regarding the query by Ray on January 30th re my comments during the interview with the Wealthy Boomer (Jonathan Chevreau) of the National Post let me clarify as follows: firstly, in answering Mr. Chevreau’s query re in-kind donations of securities to TFSAs, I added in a point off the cuff on a tax issue and found out a few days later in reading some tax tips produced by TD Waterhouse that unlike my comment, in fact an artificial loss would be deemed if someone donated securities trading at a loss to a TFSA as they would if done so to an RSP (amongst other situations – speak to your tax professional for full details). Secondly, while clearly offside with superficial loss rules, the problem in practice in enforcing this by CCRA is that most if not all financial institutions do not report transactions done within registered accounts as part of their year-end tax package so CCRA would have to do a full audit of one’s investments if they were to try and reject the claims for a realized loss, as it will not easily otherwise come to the attention of CCRA (or the investor or his/her tax advisors for that matter). Finally, now that I know that this comment caused at least one person confusion, I will revisit the issue of how to remove that slip of the tongue from the interview to try and avoid anyone relying upon that advice, albeit that in practice it may be overlooked by most. Sorry for the confusion.
@ Mark:
Thank you for the reply.
I find many people are not aware the law changed.
I am considering transfering stocks from my RRSP for cash held in my TFSA. Is that allowed?
For example, I hold $1000 worth of ABC stock in my RRSP. Can I transfer ABC to my TFSA and $1000 cash from my TFSA to my RRSP without incurring any tax problems.
Essentially, I want to take all the small positions out of my RRSP and put them into my TFSA without having to sell the stock in my RRSP and buy it back in my TFSA
Note, I am not attempting to a “dry” transfer of stock to the TFSA from the RRSP. I want to transfer an exactly equal amount of cash from the TFSA to the RRSP for the stock.
* essentially switching positions in RRSP and TFSA
@ Zoinked:
I would think you can do what you are proposing as long as the securities have exactly the same value.
You are allowed to switch registered and non-registered securities and I don’t see any difference if you switch between two registered accounts.
thx will let you know what happens when I call the investment people do the switch.
@ Zoinked:
Great! Thanks
At the top of this Q&A you state “Only shares listed on a designated exchange are allowed in a TFSA. ”
However, this document states that certain small business shares are allowed: http://www.cra-arc.gc.ca/E/pub/tg/rc4466/rc4466-08e.pdf
And IT-320R3 provides further descriptions of the PRIVATE company small business shares that are allowed. In a nutshell if you don’t own 10% or more of the company the shares qualify.
Could you provide some clarification on whether small holdings of private small business shares are allowed in a TFSA?
@JWL – Yes small business shares may be eligible to hold in a TFSA. However, the question the reader asked was why shares listed on the CNSX were not eligible to hold in the TFSA.
Quick questions;
Can I put money into TFSA and then transfer into a RRSP in my childs name without paying tax?
@ Brenda – No. There are three reasons: First, only the annuitant or the annuitants spouse may contribute to an RRSP. Second, why forgo the tax deduction of contributing to an RRSP? Third, its not premitted.
Hello. Tax Guy:
Re: TFSA
First Question:
If a Canadian stock ($5,000.00 worth) I bought this year inside my TFSA made a profit of say, 50% ($2,500.00) by the end of October this year, could I turn around and sell that stock and take the $7,500.00 and purchase another stock immediately using the $7,500.00, or, only take $5,000.00 to re-invest in the same year?
I understand that the capital gains and any dividends would be tax-free, but, there would be brokerage fees in purchasing and selling the stock.
Second question:
Can I claim a capital loss on Canadian stocks inside a TFSA?
Third Question:
Is there withholding tax on dvidiends from U.S. stocks?
Is there withholding tax on capital gains of U.S. stocks?
Glad
@Glad: Once you have contributed to the TFSA the money can grow (be re-invested) tax-free. So you can re-invest the $7,500.
Brokerage fees are not tax deductible.
The TFSA is tax-free: Capital gains, interest and dividends are tax-free. So are losses. Losses cannot be claimed in the TFSA.
Yes. There is US withholding tax applied to dividends from US stocks. Because the TFSA is tax-free, you cannot use the foreign tax credit.
No there is no withholding tax on capital gains on US stocks. There is also no withholding tax on interest from bonds issued by US domiciled companies.
Hi Tax Guy,
I over-contributed $10K to my RRSP. Can I transfer $5K from my RRSP to my TFSA? Is there a safe margin for the TFSA like the $2K over-contribution limit for RRSP?
Thank you.
Michel.
Hi Michel:
You cannot transfer directly between RRSP’s and TFSA’s. You will need t withdraw at least $8,000 from your RRSP – your broker/dealer can help you do this.
There is no administrative safe margin with the TFSA.
Does the superficial loss rule apply to trades made solely within a TFSA? I’m not talking about transferring into a TFSA. If I own an equity within the TFSA and sell it at a loss, do I need to wait 30 days to re-buy. It would seem to me that this would be okay as I’m not triggering any sort of usable loss.
Hello Brett:
Any trades inside the TFSA are not taxable and losses are not claimable. If you sold a security outside of your TFSA at a loss and then purchased the same security inside the TFSA within 30 days, then the loss would be denied.
If you bout a share in the TFSA and sold it at a loss, then there is no issue.
What if I have a trading account that runs as a business. Then I transfer over a stock to my TFSA at a lower price than I bought it at. I should still be able to consider that a loss in my business correct?
Wes,
Interesting question. I’ll address it in technical terms, but will answer directly at the end.
The superficial loss rules will apply to disposition and acquisitions of securities traded on the capital account. The rules of capital gains and losses are applied are s.54 of subdivision c of the Income Tax Act.
The rules for business income are under a separate section of the act: subdivision b. This section of the act can be a little confusing, but s.18contain provisions that mirror the superficial loss rules.
Therefore, the sale of a security on the income account at a loss that acquired 30 days before or after the disposition would result in a superficial loss. The loss would be added back to the cost and effectively defer the loss. In the case of a transfer to a TFSA or RRSP (or the sale outside and repurchase inside of the RRSP or TFSA) would result in a complete denial of the loss and no opportunity to reclaim it.
I would suggest selling the security in the open account, contributing to the registered account and waiting 31 days before repurchase.
If I write a cheque in the name of a third party (example: my daughter) – can she in turn deposit that cheque directly into her TFSA? If the answer is no, can you please explain the reason in depth. I find that if I go in person, the tellers have no problems doing it. It seems that the institution we deal with it has a policy not to do this for us. Am I breaking an laws by doing this? If so why don’t all banks flag this sort of thing?
Hello Miriam,
In order to open a TFSA, a person must be a resident of Canada and be over the age of 18, so I assume the daughter would not be a minor.
A gift of property to an adult child is not subject to the attribution rules and the child is free to do with the funds as she pleases.
What you cannot do it deposit a cheque to your daughters TFSA. The contribution must come from your daughter.
When you say I cannot deposit a cheque to my daughters TFSA – do you mean I can not go into the bank with a cheque made out to her and deposit it myself? She must do the depositing correct?
Hello Miriam,
The cheque must be drawn on your daughters account and made payable either to the brokerage firm or the herself if it is a bank TFSA.
The cheque cannot be drawn on your account.
Hello again – did I read that right that Mark Krygier basically said that the banks don’t report trades within the TFSA to the CCRA… so that if you sell a security at a major loss in a cash account and then buy back that same security within your TFSA that only a full audit would discover that you violated Superficial Loss Rules if you tried to claim the loss?
His last comment is interesting that because the bank doesn’t report registerred trades to the CCRA that this doesn’t easily come to the attention of the *investor* or the investor’s *tax advisors*. Is that implying that you could claim the loss in your non-registerred account and then claim ignorance of the Superficial Loss Rule in this respect… and if you did, and if you were audited, what exactly are the penalties for violating this rule? Do they just deny the loss and you pay the extra tax or does it come with interest and other penalties?
I didn’t read Marks comments directly, but I do know that transactions in registered accounts are not reported to the CRA. Therefore, while superficial losses will apply, it is up to the taxpayer to disclose this fact.
If the taxpayer did fail to report the loss unknowingly, they would be subject to both interest and penalties as well as would be responsible for the additional tax due. If the taxpayer did so knowingly, the penalties may be far worse as it may be viewed as tax evasion (which incidentally is a criminal offence).
The CRA conducts audits on risk basis and on a client profile type basis. This means that as the probability for failing to comply and the relative tax bill increases so does your likelihood of being audited . The client profile type of audit means they CRA picks a client profile and then targets them for audit. Client profiles may include commissioned sales people, traders in securities (day traders), or perhaps those with larger registered accounts (on a contribution basis) with frequent trade in non-registered accounts.
I am transfering my T.F.S from HSBC to ING It is wortth 2000 dollars.HSBC is going to charge me $50.00 for the transfer. ING says they should not do this as I have done all the paperwork. Could you tell me who is ccorrect please.
There are no laws or rule against bank or brokerage fees. It is common practice for brokers to charge a transfer out fee.