Questions About The TFSA

by Tax Guy - Burlington Accountant on January 30, 2011 Print This Post Print This Post

Over the last few years I have received a number of questions 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.

About The Tax Guy...

Dean Paley CGA CFP is a Burlington accountant and financial planner who services individuals and business owners locally, nationally and internationally. Dean has appeared in the National Post, Toronto Star and Metro News.

To find out more, visit Dean's website Dean Paley CGA CFP or connect via Twitter @DeanPaleyCGACFP.

Print This Post Print This Post

{ 34 comments }

Susanne M August 25, 2010 at 10:30 pm

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.

Tax Guy August 26, 2010 at 11:03 am

There are no laws or rule against bank or brokerage fees. It is common practice for brokers to charge a transfer out fee.

cross border January 14, 2011 at 2:19 pm

In the case of Canadian residents that have US tax obligations, is there tax treaty protection for the tax-free earnings within the TFSA? My investigations to date indicate that IRS deems the Canadian TFSA growth untaxed and wants their share from dual citizens, and other Canadian residents with IRS obligations. Seems a little insidious. Are you able to confirm whether CRA has concluded any tax treaty protection with IRS with regard to TFSA’s? If there is no tax treaty protection for TFSA’s, is there any signs that something in under negotiation?

Tax Guy January 14, 2011 at 9:12 pm

The 5th protocol was signed in 2008 and does not cover the TFSA. The IRS will continue to view the TFSA as an open and fully taxable account.

steve January 29, 2011 at 7:09 am

Hi Tax Guy.

I heard it may be possible to trade stocks of a company listed on a non-designated exchange if that company used to be listed on a designated exchange (suspended or delisted) using a TFSA.

My question is: Can you trade stocks of a company listed on a non-designated exchange if that same company is concurrently listed on a designated exchange and avoid the “100% immediate penalty” from the CRA? example: pink:lyscf asx:lyc I want to buy pink sheets to avoid the commissions and other fees of buying on a foreign exchange.

Thanks.

Tax Guy January 29, 2011 at 8:05 am

The shares must be qualified at the time of purchase.

Julie C January 31, 2011 at 4:04 pm

Hi,
I recently inherited a portion of my Mother’s IRA in the US. I am a Canadian citizen since 1973. My question is all about income taxes. Will I have to pay a witholding tax and a penalty for withdrawal from the IRA ? If so, will I be able to claim as a foreign tax credit ?

Thank you.

Tax Guy January 31, 2011 at 4:48 pm

From a Canadian perspective you are deemed to have acquired the property at FMV at the time of death and any withdrawals are fully taxable in Canada.

On the US side, there will be withholding tax (which you claim as a foreign tax credit in Canada) and may be a penalty tax if you are over 59.5 but I am not sure of the penalty tax.

DHall February 2, 2011 at 9:06 am

Can you transfer shares from your RSP into a TFSA, or do you have to do a partial dereg from your RSP first?

Many thanks

Tax Guy February 2, 2011 at 2:43 pm

You cannot swap assets from the TFSA to another registered account. So, in order to make an RRSP contribution, you would have to withdraw in-kind and then contribute in kind.

There should be little or no tax if the transfer is done on the same day.

I would contact the Financial Institution to confirm.

DMC February 15, 2011 at 7:07 pm

I want to transfer 5K in bonds to my TFSA ‘in-kind’. Will the value of the transfer be the fair market value of the bond, or the fair market value of the bond + interest previously earned? If the latter, why?
Thanks

Tax Guy February 16, 2011 at 4:50 pm

The transfer is at FMV. Any interest you previously received in the tax year is already taxable income.

Jim February 27, 2011 at 11:54 am

If i opened a TFSA acct in 2010 and contributed 4500 for that year, how much can i contribute for 2011? If i contribute 4000 for 2011 and have to withdraw 2000 for some reason, how much contribution room would i have left for 2011?

Tax Guy February 27, 2011 at 12:55 pm

Jim,
You will have $10,500 for 2011. Jim,
Assuming you were 18 in 2009, you got $5,000 of contribution room for each of 2009, 2010 and 2011. Deduct the $4,500 contribution last year and you are left with $10,500.

To find how withdrawals work see TFSA contribution room.

Meech March 4, 2011 at 3:50 am

My contribution limit for 2011 is $10,000
If I was to invest $10,000 into a TFSA and buy some poor shares with it which and i loose $2,000 than if i take the remaining $8,000 out of the TFSA account and close that account. Would be my contribution limit for 2012 be $13,000 given that the yearly increase is still $5,000. Does that mean i loose that $2,000 contribution limit on top of loosing the the $2,000.

Tax Guy March 4, 2011 at 2:31 pm

Yes. You loose the $2,000.

Toronto Mortgage March 11, 2011 at 8:48 pm

You loose $2000

Adam Stanley March 21, 2011 at 8:24 pm

Each year I have invested $5000 into my TFSA… I have $20,000 in my TFSA and I invest it in a penny stock… in a short period of time the penny stock does extremely well and I sell it and my TFSA is now valued at $100,000… we have a family emergency and I’m required to withdraw the whole amount ($100,000)… it is a short term problem and the money is returned to me in a couple of months… the following year can I invest another $5000 (eligible amount each year) plus reinvest the $100,000 total that I had in it before for a total of $105,000 or am I only eligible to invest the accumulated amount of $5000 for each year of the five years which would equal $25,000?

Thanks for your help,

Adam

Tax Guy March 21, 2011 at 8:43 pm

Hi there. See the link under How Does TFSA Contribution Room Work? In the article.

vw March 26, 2011 at 7:14 pm

where or what line do I input my TFSA contribution amount?

Tax Guy March 26, 2011 at 8:17 pm

TFSA contributions are not reported on your tax return.

ST February 9, 2012 at 12:15 pm

I work for a company that has an employee share purchase plan. The company will match any share contribution purchase made by the employee. Can I purchase these shares from my TFSA and have the company match also deposited. When I sell from my TFSA would all the earnings be tax free?

ST February 9, 2012 at 12:16 pm

I work for a company that has an employee share purchase plan. The company will match any share contribution purchase made by the employee. Can I purchase these shares from my TFSA and have the company match also deposited? When I sell from my TFSA would all the earnings be tax free?

david bart February 17, 2012 at 12:56 pm

I have some stocks in my RRSP, can I move them into my TFSA as long as their value is what I am allowed in my TFSA. Let’s say their total value if I sold them and removed my money from my RRSP would be say $5000.00, I know that I would have to pay tax on that $5000.00. So if I am allowed to move them to my TFSA, and their value was the $5000.00 would I then pay tax on their value which would meet my obligation to the Tax person and thus make the move from my RRSP to my TFSA work. My question is can I do this.
Thank you.

Tax Guy February 17, 2012 at 1:23 pm

The amount withdrawn would be subject to tax withheld at source and you cannot directly transfer from an RRSP to a TFSA.

cory February 27, 2012 at 10:29 pm

I bought a stock in tfsa. Itrade sent letter stating ineligible for tfsa, have to pay 50% tax penalty. If I had of known it was ineligible I wouldn’t have bought it. When a stock is ineligible in Itrade it states it and they prevent you from buying. So when they let me purchase it I thought it must be eligible. Anyway sold the stock the next day so had it for a week. On the tfsa tax form rc243-sch-a it states that if you dispose of a non qualified investment before the end of the calendar year you purchased it then remittance of the tax is not required. I don’t know if this is just for property or for stocks as well. My question is can I ignore it, thanks.

Tax Guy February 27, 2012 at 10:49 pm

One shouldn’t rely on the broker to have controls in place to prevent you from acquiring prohibited property. There are millions of securities and it is virtually impossible for every single security to be stopped.

As a general rule, you should beware if the security trades on an exchange other than the TSX (Toronto), NYSE or NASDQ.

Mike March 5, 2012 at 9:26 pm

This is my first time doing TFSA, say I contributed $5000 to my TFSA. Now when I do my income taxes how is this amount taken into account, I dont see a line for this? So doesnt that mean my income which includes the 5k is taxed?

Patrick March 5, 2012 at 11:14 pm

@Mike: TFSA’s tax money *before* you put it into the account, so you will be taxed on the $5000 you put in the TFSA. However, any gains on the money in the TFSA will not be taxed. This is different from an RRSP where there is a line item for the amount you deposited to your RRSP, and this line item effectively lowers the amount of income that you are taxed in the given period.

Tax Guy March 6, 2012 at 9:20 am

Mike,
There is nothing to report on your tax return for the TFSA.

Al February 19, 2013 at 4:49 pm

I currently own a bank account that is “NOT” designated as TFSA
I have no use for this account
Am I safe in having this account changed to a TFSA [if possible] or
would I be safer in opening a fresh account for the TFSA business

Brad F February 21, 2013 at 10:59 am

Hi Tax Guy,

I am a Canadian Living in Canada with a TFSA. I currently have holdings from the TSX in my self directed TFSA. I want to start purchasing and trading stocks on the NYSE within my TFSA.

Does USA recognize canada’s TFSA? Will I be required to pay American taxes on all Capital gains on NYSE stocks? Will I be required to file US taxes and register with the US IRS to begin doing this? If so, what are the steps I need to take to start doing this?
There is no clear information online about this. Any help would be appreciated.

Thanks!

Tax Guy - Burlington Accountant February 21, 2013 at 11:08 am

Brad,
The US does not recognize the TFSA and their withholding taxes will apply (15% on dividends).

You might be able to file a US return but the cost of doing so may not be worthwhile.

Ken K March 5, 2013 at 1:19 am

I deposited 5500 into my TFSA for 2013. Can I take that amount and purchase a stock in the same year, or would I have to wait until 2014 to make the purchase. I have a self directed TFSA.

Comments on this entry are closed.

Previous post:

Next post: