- Canadian Tax Resource Blog - http://blog.taxresource.ca -

Questions About The TFSA

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 [1] 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 [2] 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.