Understanding TFSA Contribution Room

by Tax Guy - Burlington Accountant on December 30, 2010 Print This Post Print This Post

Reader Question If I do not open a TFSA in 2009 will the $5,000.00 contribution room carry forward, enabling me to contribute up to $10,000.00 in 2010?

If you do not use your TFSA contribution room, it will definitely carry forward. You are given $5,000 per year of contribution room. As long as you are a resident of Canada and over age 18, you will be able to carry forward and add your pays unused contribution room to new TFSA contribution room.

Who Can Contribute To A TFSA?

Anyone who is both a resident of Canada and is over the age of 18 can contribute to a TFSA.

If you do not contribute to a TFSA or don’t use all of your contribution room, the unused amount will carry forward indefinitely. There is no need to open a TFSA account to generate TFSA contribution room.

How To Calculate TFSA Contribution Room

The TFSA contribution room is calculated differently than RRSP contribution room and is more straight forward:

  • Unused TFSA contribution room from last year
  • Plus: TFSA withdrawals from last year
  • Plus: The new TFSA dollar limit from the current year
  • Less: Contributions to the TFSA in the current year.

In the comments below there is an example of how the TFSA contribution room works.

Avoid Over Contributions

There is a penalty tax of 1% per month on over contributions (also called the excess TFSA amount). The penalty tax is based on the highest value in the TFSA during the month.

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.

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{ 47 comments }

Northern Alex January 4, 2010 at 9:03 am

It might be even more, depending of our inflation in 2009…..

http://www.cra-arc.gc.ca/E/pub/tg/rc4466/rc4466-08e.pdf

“……For 2009, if you are eligible, you can contribute up to $5,000 to
your TFSA. After 2009, the annual TFSA dollar limit will be
indexed to the inflation rate.

The indexed amount will be rounded to the nearest $500. For
example, assuming that the inflation rate is 2%, the TFSA dollar
limit would remain at $5,000, for 2010 and 2011, but would
increase to $5,500 for 2012.”

Tax Guy January 4, 2010 at 11:06 am

@ Northern Alex: Inflation will not be an issue. CPI was only 1% for the 12 months ending November.

Chris January 6, 2010 at 10:24 pm

I bought $5,000 worth of stock in my TFSA in March 2009 (Teck Resources). The valueof my TFSA has now increased to approximately $32,000.

So, if I withdraw all $32,000 tax free (downpayment – here we come!), will my TFSA contribution room next year increase by $32,000? Will the $32,000 also be indexed to inflation?

I’m a bit confused by this bullet I found on CRA’s site:

http://www.tfsa.gc.ca/tfsapamphlet-eng.html

• You can withdraw funds available in your TFSA at any time for any purpose,— and the full amount of withdrawals can be put back into your TFSA in future years.

Tax Guy January 6, 2010 at 11:04 pm

@ Chris –

With the TFSA, he amount you withdraw can be re-contributed in future but is not indexed to inflation. In your case, if you withdraw the $32,000 and don’t make contributions until 2012 your contribution limit would be $32,000 plus $5,000 for 2010, $5,000 for 2011 and $5,500 for 2012 or $47,500 (assuming 2% inflation).

Northern Alex January 6, 2010 at 11:34 pm

@TaxGuy:
Sorry, I don’t want to be a smarty pants, but I understood it differently:
Looking at your link I understood CRA that if Chris withdraws the $32,000 in 2010 he will be allowed only the max contribution amount for both years.
He won’t be able to add more than $10,000 back in his FTSA to re- invest in 2010…

That’s how I understood it.

Are you positive about that?

Tax Guy January 7, 2010 at 8:26 am

@Northern Alex

I’m not sure where the $10,000 for both years comes from but …

In 2009 Chris contributed $5,000 to his TFSA that grew to $32,000. In 2010, he withdraws the full $32,000.

The TFSA dollar limit for 2010 is $5,000 and assuming a 2% annual level of inflation, the TFSA dollar limits would be:
• 2011 – $5,000
• 2012 – $5,500

2009:
2009 TFSA Dollar Limit = $5,000
Less: 2009 Contributions = $5,000
Unused contribution room carried forward = $0

2010:
Chris withdraws $32,000 from the TFSA and does not make any contributions. His contribution limit for 2010 is:

Unused contribution room carried forward = $0
Plus: 2010 TFSA Dollar Limit = $5,000
Available room for 2010 = $5,000

2011:
Unused contribution room carried forward = $5,000
Plus: 2010 Eligible withdrawal = $32,000
Plus: 2011 TFSA Dollar Limit = $5,000
Available room for 2011 = $42,000

2012:
Unused contribution room carried forward = $42,000
Plus: 2012 TFSA Dollar Limit = $5,500
Available room for 2011 = $47,500

MMan March 18, 2010 at 3:18 pm

Can a TFSA account ever go dormant? I know there are rules that says that if there is no activity within 9or10 years that the bank holding my TFSA has an obligation to pay it to the Bank of Canada. If that is the case, then the monies are paid out of the TFSA and paid to the holding account at Bank of Canada, which are not tax-sheltered. Can anyone confirm/help? Reference to legislation/websites would be appreciated.

Tax Guy March 18, 2010 at 3:51 pm

MMan: I can’t say if the dormancy rules apply to registered accounts or not. You can try and look at the Office of The Superintendant of Financial Services website.

Bernie March 24, 2010 at 8:38 pm

If I contribute $5,000 to TFSA in year one and buy stocks which pay, say $500 in dividends in year one and these are reinvested (DRIP). Then is the contribution limit for the following year reduced to $4,500 because I reinvested the $500 tax free income.

Tax Guy March 25, 2010 at 9:10 pm

Bernie: The investment income earned does not affect your TFSA contribution room. Withdrawals from your TFSA will affect your contribution room.

In the scenario, you mentioned, your year 2 TFSA room would be $5,000.

Bernie March 26, 2010 at 9:30 am

If the TFSA contains Securities enrolled in a DRIP then is the portion of the dividend, all of which itself is tax free, considered a “contribution” for the current year. In other words does my 3 shares of BNS “purchased” at $150 through DRIP apply against this year’s or next year’s contribution room. If it applies against current year’s limit then I will have over contributed ( assuming I made full $5,000 contribution on January 1st). If it is to be considered for next year’s limit calculation it all becomes very complicated over the years.
Also is there a cap on this plan – for example after 10 years I have contributed $50,000 and this earns 10%. So in year 11, I will have $5,000 tax free income, but it is all in DRIP. Or can I keep going and going to $100,000 in “new” contributions like the everready bunny.

Tax Guy March 29, 2010 at 8:45 pm

Hi Bernie:

The income earned inside the TFSA is “tax-free”. If you have a stock inside of a TFSA, the dividends received are received inside the TFSA and are tax-free. It increases the balance in the TFSA and can be re-invested … tax-free.

dub April 22, 2010 at 5:43 pm

nice blog Tax Guy.

Just to clarify… If I didn’t open a TFSA account in 2009 and have since opened one in 2010. My contribution room is 10k?

thanks!

Tax Guy April 23, 2010 at 7:52 am

Correct!

lisa w June 2, 2010 at 9:05 am

I was wondering about the tfsa room…it says on my tax return mine is at $10000 what does this mean? there is 10000 dalloars in there for me to use or do i have roo for me to deposit up to $10000? please let me no…

Tax Guy June 3, 2010 at 9:37 am

Hello Lisa,

The TFSA is a type of bank or investment account. You deposit money in the account, invest it, and your investment earnings grow tax-free. In addition, when you withdraw the funds, you pay no tax on the withdrawal.

The $10,000 on your notice of assessment it telling you that in 2010, you can deposit up $10,000 in a TFSA.

Francois Girard June 7, 2010 at 12:53 am

Here a question ,are the cost of trading stock inside my tfsa included in the $5000.00 limit ex: If I do 10 trade at $15.00 for a cost of $150.00 is the value of the stock limit to $4850.00

Tax Guy June 7, 2010 at 1:22 pm

Hello Francois:

The cost of trading your stocks is not related to your TFSA contribution. If you deposit $5,000 to your TFSA, you have made a $5,000 contribution. Your trade fees are added to your purchase price.

jamil June 14, 2010 at 12:34 pm

if you have 10,000 in your TFSA contribution room, can you take that money out or does it stay there?

Jacki Rayman June 17, 2010 at 8:20 pm

if I opened a tfsa in 2009,did’nt put anything in it can I in say 10 years put in 50,000.00 all at once?

Tax Guy June 19, 2010 at 6:29 am

Hi Jackie,
Yes. You are correct.

sreeni pendyala June 18, 2010 at 12:29 pm

i guess tfsa is indexed and it can go up ever year.. if so what’s the amount for 2010 since it was introduced in 2009, ..

tia

Peter Jones June 24, 2010 at 4:17 pm

I also was caught up in this situation because my bank failed to supply me with a manual (They said they came in “late” but never mentioned about over RE-contributing to the account OR about withdrawls when I made the one sole withdrawl for a new furnace). I called thr CRS and also got the form from the gov. to “rectify” the sitration.My financial advisor at the bank looked at the form and couldn’t understand it or help me with it. (The form does no good to you it’s only an account of your “bill” from CRS. There needs to be a class action law suite. How? -Peter.

Tim June 25, 2010 at 9:30 pm

So, I’m not worried about last year, I’m worried about THIS year. I only started withdrawing and re-contributing in January this year when everyone was still oblivious to the fine print. I know they are giving exemptions for last year, but there’s a slim chance they will do it again.

Anyone else in the same boat or know if there is anything we can do to correct the situation now that we know?

P.S. I transferred my TSFA in lat January. All $10,000 of it, and have been withdrawing/re contributing since. I am a student and dipped into the savings quite a bit.

lilian July 15, 2010 at 6:57 pm

can i open two accounts different bank for tfsa

Tax Guy July 15, 2010 at 9:29 pm

Hi Lilian,
Yes. You can have more than one account.

Gary September 4, 2010 at 7:46 pm

I want to consolidate some shares of a particular company into one account. Can I withdraw stock certificates from my TFSA or must I sell them first?

Tax Guy September 5, 2010 at 8:15 am

Gary,
If you are moving the shares to another TFSA, you should ask the new FI to initiate and transfer. If you withdraw from your TFSA to do the switch, the room will not be added back until next year.

Gary September 5, 2010 at 10:30 pm

So if I understand you correctly I can withdraw the share certificate and combine them with those in my cash account.
And then next year I will be able to contribute 5000 + the value of these certificates Correct?
Gary

Tax Guy September 6, 2010 at 8:04 am

Correct.

celeste October 18, 2010 at 10:32 am

hi, i dont understand an of this, i recieved an income tax assessment, n it says, “your unused tax-free savings account contribution room is $10,000”. ive looked online at the website provided n didnt get any help. i dont understand. if u would send an email explainng this in lamens terms that would be great.
thanks

Alex October 20, 2010 at 9:49 am

Hi – if I overcontributed last year (moved money from one TFSA account to another and of course burst my $5000 limit), does the overcontribution carry over into this year?

Quite simply, I “contributed” $10,000 last year – $5000 x2. This year will I have $0 of room since the overcontribution has carried forward into 2010? Or do I simply pay the taxes on the overcontribution and start over at $5000?

Tax Guy October 22, 2010 at 9:02 am

The over contribution would be reset when your limit increased. So, if you made two contributions last year and effectively had $10,000 of contributions, the over contribution would end January 1, 2010.

So, for 2010, you would have 0. However, since this is really the same money, you may be able to appeal to the CRA and have the limit adjusted.

David October 30, 2010 at 3:18 pm

I found something that I do not understand on official web-site

“Under proposed changes announced on October 16, 2009, certain withdrawals made in the previous year may not be added back in the following year, after that date. The exclusion in the first bullet above also applies (after that date) to:

* withdrawals of amounts included in the definition of “advantage”,
* amounts upon which income tax was required to be paid by the TFSA trust; and
* any other income related to those amounts”

What is the definition of “advantage”? I have tax advantage saving account with cibc. Does it mean that If I withdraw my money I cannot reinvest it?
Thank you

Tax Guy October 31, 2010 at 3:38 pm

People were using swaps between TFSAs an RRSPs and that is what these rules are limiting. Having a TFSA at the bank is OK.

Ginger December 8, 2010 at 5:06 pm

If I exercise some share warrants at .10 and want to contribute the share to my TFSA, is the valuation based on the price I paid or the price of the shares at the time of exercise ?

For example, I buy 100,000 shares at .10 by exercising 100,000 warrants – I therefore paid $10,000. I have contribution room next year for $10,000 because of some withdrawals this year and next years allowable $5000. The actual share price is trading at say .25. Am I allowed to place the 100,000 shares into my TFSA based on my cost of .10/share ?.

Tax Guy December 9, 2010 at 11:55 am

Hi Ginger,

The fair market value of the property transferred to the TFSA is the value used. The market value of the shares contributed is the TFSA contribution: The value as expressed on the stock exchange times the number of shares.

Sherry December 9, 2010 at 11:15 am

In 2009 I deposited $5,000 in a TFSA at my bank. I gained a small amount of interest.
In 2010 I opened a trading account and deposited my 2010 $5,000 TFSA contribution.
In 2011 I will deposit another $5,000 for that year’s contribution into my trading account.

Question: I want to withdraw my 2009 TFSA Contribution from my bank and deposit into my trading account. My understanding is that as long as I withdraw prior to December 31, 2010, I can redeposit that 2009 $5,000 plus the interest I received into my trading account in 2011. I will simply be withdrawing one year and redepositing the next year with no penalities, and this will keep my 2011 $5,000 contribution room available.
Am I correct?
Also do I need a Transfer Form from one institution to another or can it simply be a personal withdraw and personal deposit.

Thank you

Tax Guy December 9, 2010 at 11:59 am

If you withdraw before December 31 you can re-contribute the amount withdrawn in January the following year.

Or you can ask the brokerage firm to request a TFSA transfer. This would not require a withdrawal. The broker can help you with this.

confused January 4, 2011 at 9:30 pm

It says on this notice of assesment, based on available information at the beginning of 2010, your unused tax-free savings account contribution room is $10,000. I am honestly no good with all this tax stuff and to be honest I didnt even know I had this savings account to begin with. So what I would like to know is, is this money there to take, or does it just mean that I can put up to $10,000 into this account? I know its kind of a dumb question but like I said I dont know too much about this. :/

Tax Guy January 5, 2011 at 3:31 pm

You need to open a TFSA account at a bank or brokerage firm. According to your NOA, you would be able to deposit up to $10,000 to the account. The investment income generated inside of the account would grow tax free.

norm. January 4, 2011 at 11:20 pm

What, oh What, is the (MAX) contribution limit for 2011?? I have contributed the max in both 2009 and 2010, but CANNOT find the limifor this year….I have now searched for about an hour!!!

Tax Guy January 5, 2011 at 3:33 pm

@norm:
The new amount for 2011 is $5,000. Here is the Department of Finance’s news release: http://www.fin.gc.ca/n10/10-132-eng.asp

Gary January 10, 2011 at 11:16 am

Hi
I am planning to make a contribution to my TFSA. I would like to contribute shares that I purchased through a private placement several years ago. I purchased these share for 10 cents per share and they were just listed on the CNQ in November of 2010.
They have only traded once since being listed (Jan 4 2011 5000 Shares) at 16 cents per share. My question is, at what value would the contribution be made ? 16 cents or the 10 cents for which I purchased them for.
Gary

Tax Guy January 10, 2011 at 2:19 pm

Provided these shares are in fact qualified shares that are permitted to be held in the TFSA, then the contribution would be valued at fair market value. Although thinly traded, it is likely the contribution would most likely be valued at the current bid price (this is the price the market will pay for your shares).

If we assume the current bid price is still $0.16, then you will have a capital gain of $0.06 per share.

Dan January 28, 2011 at 12:16 pm

I’m paranoid about over contributing. I just opened my TFSA trading account in Dec ’10.

So to be clear, I can contribute a lump $15, 000 as of today (Jan ’11)?

Tax Guy January 28, 2011 at 1:22 pm

Dan,
If you have never had a TFSA account anywhere, then yes, your limit is $15,000. Look at your Notice of Assessment or contact the CRA for complete verification.

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