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.
Related Articles
- TFSA Questions And Answers
- Understanding TFSA Contribution Room
- TFSA Over Contributions
- The Tax Free Savings Account (TFSA)
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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.
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?
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.
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.
The shares must be qualified at the time of purchase.
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.
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.
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
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.
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