One Way to Handle TFSA Assessments from the CRA

I had a nice conversation this morning with a chartered accountant (CA) with who I work regarding assessments raised by the Canada Revenue Agency (CRA) relating to the Tax Free Savings Account (TFSA).   I made notes of the conversation, then called the CRA to run the scenario by them.

They agreed with this process.

These recommendations are just that, recommendations, relating to relief for those assessed with penalties for over-contributing to their TFSA.

Write a letter to the CRA asking for relief.  Send the letter to the following address:

TFSA Processing Unit
PO Box 9768, Stn T,
Ottawa, Ontario
K1G 3X9

In the letter, make sure that you include:

• Your Social Insurance Number (SIN) as it is the reference number to your TFSA account;
• The circumstances and facts which led to the over-contributions.  As an aside, if you knew you were putting in too much – you might not want to include that fact;
• The actions you took to immediately remedy the situation as soon as you found it that you had contributed more than you were allowed;
• The financial institution you have your TFSA with, and any related account numbers as that institution (the CRA loves to look for patterns – possibly a specific institution is not notifying their clients of the perils of over-contributing or maybe a flag is missing on their system to notify the account manager once an account goes into penalty-territory;
• Any supporting documentation – written confirmation or statements from the financial institution – if it was their fault, and to show that you rectified the situation as soon as possible);
• Also make sure to include a copy of the letter you received from the CRA notifying you that you are being charged penalties for the TFSA account.

Unlike a Taxpayer Relief application available in the Income Tax Act (ITA) and Excise Tax Act (ETA) there is no formal relief process known to be used by everyone currently, so this soft approach has been used and with success.

The CRA may, at their discretion, lower or completely reverse the assessed penalty, or they may send you back a letter asking for payment of the penalty.

It is certainly worth an attempt.

If you have been assessed a penalty for over-contributing to your TFSA and are either too busy or would prefer the letter be written by a professional firm, please contact us and we would be more than willing to assist you in this process.

#Intaxicating

2013 TFSA Annual Contribution Limit Increase

On November 26th, 2012, The Canadian government announced that it had boosted the limit on its popular Tax-Free Savings Account (TFSA), by $500.

Beginning next year, the ceiling will be $5,500 a year.

When it introduced the savings vehicle in 2009, the government said the $5,000 limit would move in $500 increments tied to inflation. This is the first year that’s happening.

“An additional $500 in annual TFSA contribution room can have an important impact on the amount of tax-free savings an individual can earn,” the government said.

“Over a 20-year period, an individual can accumulate significantly more in TFSA savings than under the original $5,000 annual contribution limit. For example … a middle-income saver could accumulate about $2,340 more in tax savings on their investments than if the additional investment had been made in a taxable savings vehicle (unregistered account).”

The TFSA has been popular since it was introduced, though recent surveys suggest Canadians still need more education.

The latest survey by Bank of Montreal showed less than 50% of savers are putting in the maximum of $5,000 a year, though 57% say they will go to ceiling within the next five years.

But while 60% of those polled claim to be “knowledgeable” about the savings vehicle, only 44% knew the contribution limit and 37% didn’t know what TFSAs can hold, such as stocks and bonds.

See the government’s calculations, here.

Logo that appears on Canadian government documents (Photo credit: Wikipedia)

 

Related articles

• Tax-free savings account will increase (reddeerconservative.wordpress.com)
• TFSAs grow up: Why RRSPs now have some serious competition (business.financialpost.com)
• Ottawa bumps up TFSA limit by $500 (business.financialpost.com)
• TFSA News (canadianmdinvestor.wordpress.com)

Internal Information on the TFSA

Tax-Free Savings Account (TFSA)

Introduction
The Tax-Free Savings Account (TFSA) is a flexible, general-purpose account that allows residents of Canada age 18 and over to save while benefiting from tax-free earnings and growth. Available for the first time on January 2, 2009, it has been designed to help Canadians save for important goals, plan for their retirement and reduce their overall tax bill. In general, investments held in a TFSA will be the same investments available for a registered retirement savings plan.
This includes: mutual funds, money market funds, cash deposits, Guaranteed Investment Certificates (GICs), publicly traded securities and government and corporate bonds.

This post was designed to help you become familiar with this investment vehicle and will explain the benefits, features and planning strategies for the TFSA.

Tax-Free Savings Account Overview

Purpose
The Tax-Free Savings Account (TFSA) allows individuals to invest money in an account that will grow on a tax-free basis. Some of its key features include:
• The maximum annual contribution is $5,000 per person.
• No tax will apply on withdrawals from a TFSA, and these withdrawals can be used for any purpose.
• TFSA is a ‘registered’ account reflecting elements of both RRSP and non-registered accounts.

Basic TFSA Rules
The following table provides an overview of the basic features of the Tax-Free Savings Account.

Basic Features of the Tax Free Savings Account

Eligibility
• Any individual who is a resident of Canada and who has attained age 18.
• A trust or corporation cannot be the owner of a TFSA.
• Accounts cannot be set up as “in trust for”.
• Joint clients cannot be the owner of a TFSA.
• There is no limit as to the number of TFSAs that an individual can set up. The total contributions to these accounts are limited to the individual’s TFSA contribution room.

Contributions
• Contributions can begin January 2, 2009.
• Maximum $5,000 contribution per person in 2009 regardless of income. The contribution limit will be adjusted annually subject to inflation.
• Contributions to an account can only be made by the account holder. Although contributions to a spouse’s TFSA will be allowed through gifting, they cannot be made directly. This is very different than setting up recurring contributions to a spousal RRSP in which the money is withdrawn by one spouse but deposited into the RRSP of the other.
• There is no maximum age restriction on contributing to a TFSA.
• Each year the government will determine and advise the account holder of the TFSA contribution limit for that tax year.

Carry Forward
• Unused contribution room can be carried forward to future years. There is no limit to how much contribution room can be carried forward.

Withdrawals
• Funds can be withdrawn from a TFSA at any time and for any purpose without incurring tax.
• Amounts withdrawn can be re-invested back to a TFSA as contribution room is regained the following year.
• Withdrawals from a TFSA will not affect eligibility for federal income-tested benefits and credits such as the Child Tax Benefit, Guaranteed Income Supplement, Old Age Security benefits, Age credit and Goods and Services Tax credit.
• There are no age restrictions on withdrawing from a TFSA.

Fees & Penalties
• Overcontributions will be subject to a 1% penalty that is assessed on a monthly basis.
• The penalty tax applies as soon as the TFSA contributions exceed the TFSA contribution room.
• The individual would have to withdraw the excess amount to stop the penalty tax from accumulating. The penalty will continue to apply until the new room is generated.

Taxation
• There is no tax on earned interest, dividends or capital gains even when withdrawn.
• Contributions are not tax-deductible for income tax purposes.
• Interest on funds borrowed to contribute to a TFSA is not tax-deductible.

Eligible Investments
• Mutual funds
• Money market funds
• Cash deposits
• Guaranteed Investment Certificates (GICs) and Term Certain Annuities (TCAs)
• Publicly traded securities
• Government and corporate bonds

Statements
• TFSA will be a new plan type on client statements.

TFSA vs. RRSP vs. Non-Registered Accounts

Below is a quick comparison between a TFSA, RRSP and non-registered investments.  Beside each example will be “n/a” for not applicable, or a “y” for yes it applies, or a “n” for no it does not apply.   The first letter is for the TFSA, second one for the RRSP and last one for non-resigstered accounts.  Get it?

Quick Comparison:  TFSA   RRSP   Non-registered

REGISTERED
Contributions:
■ Contribution limit for 2009?  TFSA: $5,000 RRSP: $21,000*  Non-reg:  n/a
■ Contributions tax deductible?  TFSA: N  RRSP: Y   Non-Reg: N
■ Deductibility of money borrowed to invest? TFSA: N  RRSP: N   Non-Reg: Y
■ Unused contribution room carried forward?  TFSA: Y   RRSP: Y   Non-Reg: n/a
■ Future contribution limits indexed for inflation?   TFSA: Y   RRSP: Y  Non-Reg: n/a
■ 1% penalty charged on overcontributions?  TFSA: Y   RRSP: Y  Non-Reg:  n/a
■ Contributions permitted past age 71?  TFSA: Y   RRSP:  N   Non-Reg: Y

Withdrawals:
■ Withdrawals create additional contribution room?  TFSA: Y    RRSP: N    Non-Reg: n/a
■ Withdrawals may reduce income-tested federal benefits?  TFSA: N   RRSP:  Y   Non-Reg: Y
■ Tax exempt upon withdrawal?  TFSA: Y    RRSP: N    Non-Reg: N   **

Earnings:
■ Earnings tax exempt while in plan? TFSA:  Y  RRSP:  Y  Non-Reg N**

* Subject to ‘earned income’ provisions.
** Dependent upon the underlying investments.

Potential Planning Strategies

The Tax-Free Savings Account is an excellent savings vehicle that should be incorporated into every client’s plan in some form or another. There are many key planning strategies that take advantage of the TFSA strategies including:

• Maximize RRSP contributions and invest the tax refund into a TFSA
• Use the TFSA for retirement savings
• Use the TFSA for short term goals like saving for a house purchase
• Use the TFSA as an emergency fund
• Use a TFSA/RESP investment strategy

Invest in the TFSA before Non-Registered
Regardless of the intended purpose of the account proceeds, clients should maximize contributions to their TFSA before depositing non-leveraged funds to other non-registered investments. While non-registered investments can provide tax advantages such as the dividend tax credit and the 50% inclusion rate for realized capital gains, the TFSA is the only type of savings program that allows for investment income to grow and eventually be paid out tax-free.  Also, contributions and investment income that are withdrawn can be reinvested in a TFSA as withdrawals are added to the owner’s contribution room in the following year.  Thus, any individual who is saving on a non-registered basis should maximize the TFSA before investing in non-registered investments.

Below are more descriptive details of each of these and other planning strategies.

Retirement Planning
RRSPs will continue to be the cornerstone of retirement savings. RRSPs provide tax-deductibility for contributions made; the investment earnings are tax-sheltered; and, there are income-splitting opportunities under the pension income splitting provisions and through the use of spousal RRSPs. Typically, the best retirement planning strategy for most individuals is to maximize their RRSP contribution room, invest the next $5,000 in a TFSA and then invest in non-registered investments.

However, some individuals cannot contribute very much to RRSPs, because of their participation in Registered Pension Plans. As well, there are other individuals who have a low marginal tax rate who may choose not to contribute to RRSPs. The TFSA is an excellent savings alternative for these individuals.

In many circumstances, the use of RRSPs alone will not guarantee an adequate level of post-retirement income. The TFSA can be used to supplement this income. Not only are the TFSA withdrawals tax-free, these payments will not affect federal income-tested benefits such as OAS, GIS, the GST credit, and the age credit.

Example:
A client who is currently at a 40% marginal tax rate can afford to save $5,000 in an RRSP or in a TFSA, or in a combination of both. The client’s marginal tax rate during the retirement years will be 30%.
If the client decided to save the entire $5,000 per year in a TFSA, assuming a 6.5% average rate of return, after 30 years the TFSA would be worth $446,791 (tax-free assets). If the client contributed $5,000 per year to an RRSP, and then invested the annual $2,000 tax refund into a TFSA, after 30 years the pre-tax value of the RRSP would be $446,791 and the value of the TFSA would be $172,750.
If the client received retirement income over a 30-year period from these accounts, the combination of the RRSP and the TFSA would provide $2,870 per annum more in after-tax income over the 30-year period than under the TFSA alone.

Short Term Goals
The Tax-Free Savings Account may be used in a situation in which the client needs the funds for a major purchase within a relatively short period of time, such as for a car purchase, down payment on a home, or a special vacation. Not only will there be no tax with respect to the amounts withdrawn from the TFSA, the client will be able to re-contribute the amounts withdrawn from the TFSA at a later date, as the withdrawn amounts are added to the person’s TFSA contribution room in the following year.

Example:
An individual begins contributing $416 per month into a TFSA starting in January, 2009 earning 6.5% on average. After five years, the individual would have accumulated $29,404 on a tax-free basis for a down payment on the home. The amount redeemed for the down payment is added to the individual’s TFSA contribution room in the following year.

Emergency Funds
A standard financial planning recommendation is to create an emergency fund equivalent to at least three months of after-tax income that is easily accessible in case there is a need for funds. Contributing to a TFSA for emergency fund purposes allows the client to withdraw funds without having to pay taxes. Once the emergency has been resolved, the withdrawal can be returned to the TFSA without penalty (provided that the client has the TFSA contribution room). Seniors can maintain their emergency fund in a TFSA with no affect on government benefit and credit programs.

Education Planning
The traditional post-secondary education planning strategy has been to use the Registered Education Savings Plan (RESP). Under the RESP, the federal government provides a Canada Education Savings Grant (CESG)
which is normally paid at a rate of 20% of the first $2,500 of contributions made to the RESP each year, or $500 a year in Grants. The total lifetime CESGs per beneficiary cannot exceed $7,200, and no Grants are paid after the beneficiary attains age 17.
As the costs of post-secondary education may exceed the total of the RESP contributions, the CESGs, and the investment income, some parents will decide to augment these amounts by contributing to the TFSA, especially when further contributions to an RESP will not attract CESGs. One advantage of the TFSA over the
RESP is that the parents have tax-free access to the TFSA assets if the child does not go on to post-secondary education or the child drops out of the program.

Example:
The parents have a child born in 2008. Assuming that the parents can afford to save $5,000 a year for the child’s post-secondary education, it would be possible for the parents to save all of these amounts in a TFSA. If the parents saved $5,000 a year for 18 years in a TFSA at an average rate of return of 6.5%, after 18 years there would be $172,584 of TFSA assets available.
However, by not using the RESP, the parents would not be receiving the CESGs. If the parents saved $2,500 a year in the RESP and $2,500 in the TFSA for 18 years, the combined value of the RESP and TFSA would be $187,753, an increase of $15,169. This combined RESP/TFSA savings strategy allows the child to receive the maximum amount of CESGS that are available.
The TFSA can also be used to pay for non post-secondary education expenses like private school tuition.

Collateral
The owner of a TFSA is allowed to use the TFSA assets as collateral for a loan without incurring a tax penalty. This is different than under an RRSP. If the owner of the RRSP uses the RRSP assets as security, the entire value of the RRSP becomes taxable.

Gifting
A parent or grandparent may wish to make a gift to an adult child for investment purposes, which will be placed by the child into his or her TFSA. As every resident of Canada who is at least age 18 will generate $5,000 per annum of TFSA contribution room irrespective of income, many parents will encourage their children to save through the use of “TFSA gifts”.

Income Splitting
Normally, when spouse A makes a monetary gift or a gift of securities to spouse B, the investment income earned by spouse B on the gifted amounts is taxable to spouse A under the “attribution” rules contained in the Income Tax Act. However, when spouse A makes a gift to spouse B that is invested by spouse B in a TFSA, there will be no attribution of the TFSA investment income to spouse A as long as the gifted funds remain in the TFSA.

Estate Planning Opportunities

Death of a TFSA Holder
Beneficiary: Spouse or Common-law partner
It is possible for the tax-free status of the TFSA to continue when the owner has a surviving spouse or common-law partner. The following options are available:
■ The owner can designate that his or her spouse or common-law partner is the “successor account holder” of the TFSA (not applicable in Quebec for Investors Group products).* The owner can also name a contingent beneficiary, whose designation would take effect if the spouse or common-partner pre-deceases the TFSA plan holder.
■ The owner can designate the spouse or common-law partner as the beneficiary to receive the TFSA assets. The surviving spouse or common-law partner can transfer the TFSA assets to his or her own TFSA without affecting their contribution room.
■ The owner can indicate in the will that the spouse or common-law partner is to receive the TFSA assets.
Once the executor (“liquidator” in Quebec) has paid the debts and taxes, the executor/liquidator can distribute the TFSA assets to a TFSA owned by the spouse or common-law partner without affecting his or her contribution room.

Non-spouse/common-law partner beneficiary
A non-spouse/common-law partner beneficiary cannot be designated as a successor holder. When the beneficiary is not the spouse/common-law partner, the tax-free status of the TFSA will cease upon the death of the owner.
If the TFSA owner did not name the spouse or common-law partner as the “successor holder” or name the individual as the beneficiary, the TFSA assets will be paid to the estate. Only the investment income that was earned by the TFSA after death will be taxable.

Provincial Beneficiary Legislation
In common-law jurisdictions (i.e. provinces other than Quebec), provincial or territorial legislation has not yet been updated to allow for beneficiary designations under TFSAs. Thus, on an interim basis, the owner of the TFSA may wish to name the beneficiary (or designate the spouse as the “successor account holder”) by updating his or her will in order to ensure that the owner’s wishes are carried out.
Note: Upon death, any and all unused TFSA contribution room is lost.

Successor Holder
When the surviving spouse or common-law partner is named as the ‘successor holder’, upon the death of the TFSA plan holder the spouse simply becomes the new owner of the TFSA, which remains intact. Where the surviving spouse/common-law partner is named as the beneficiary, upon the death of the TFSA plan holder, the assets in the TFSA must either be paid out to the surviving spouse/common-law partner or be transferred to the spouse/common-law partner’s own TFSA.

Tax-Free Savings Account Program Administration and Forms

For the TFSA, Canada Revenue Agency has advised financial institutions that there must be a separate TFSA Client Application. The following is a list of the TFSA application differences.

1. TFSA applications are for individual clients only. (They cannot be set up a TFSA for a company, joint clients, trust or “in trust for” accounts).
2. Beneficiary section has been modified to meet TFSA requirements.
3. Consultants need to provide the Trust Agreement when signing the application.
4. There is no minor section on the application.
5. Application refers to the plan holder rather than the applicant.
6. TFSA plans come into effect January 2, 2009

Account Set-up
Clients wanting to establish a TFSA must complete the respective TFSA Client Application for the product/platform. Below is a list of the applications available:

For contributions, redemptions, transfers and services, existing forms have been modified to accommodate the TFSA.

Group TFSA Accounts
The only pricing option available for Group TFSA accounts is No-Load with the exception of Investors Real Property Fund which only offers the Deferred Sales Charge option.

Contributions
Contributions to a TFSA can begin effective January 2, 2009. Under the TFSA, the contribution room becomes available on January 1 of the year. Thus, if a person contributes $5,000 to the TFSA in 2009, the person will be able to contribute another $5,000 to the TFSA on January 1, 2010. Please note that if a client attains age 18 during the year, contributions to the TFSA can begin no earlier than the client’s 18th birthday. As well, a client must be a resident of Canada in order to establish a TFSA.

Redemptions
Redemptions from the TFSA can be made at any time of the year. Redemptions made prior to December 31 will result in an increase in the contribution room equal to the redemption, the increase being applicable in the following year.

Transfers
The following transfers can be made to a TFSA:
■ A non-registered investment such as a mutual fund or shares can be transferred “in kind” to a TFSA as a contribution.
Remember that this is considered to be a “disposition” of the investment for tax purposes, such that any capital gains accrued on the non-registered investment will be realized, and 50% of those capital gains will be taxable. Please note that if there are accrued losses on the non-registered investment, the loss is not recognized as a capital loss for tax purposes. In this situation, the client should sell the investment, place the cash proceeds into the TFSA Money Market account and after 30 days, transfer the Money Market account into the original mutual fund. This will allow the capital loss to be claimed without triggering the “superficial loss” rules. However, this will cause the DSC schedule to restart.
■ A TFSA from one financial institution can be transferred to a TFSA at another institution with no tax consequences.
■ A TFSA of a deceased holder can be transferred to the TFSA of the surviving spouse or common-law partner with no tax consequences.
■ A TFSA from a holder can be transferred to the TFSA of the holders’ spouse or common-law partner under a divorce or separation with no tax consequences.

Optional Services
The following optional services for mutual funds are available: PAC, SWP, STEP, DRIP, cash distributions* and Money Market Fund Chequing.

TFSA Investor Profiles

Now that you know the rules applicable to the TFSA, the question is “Who should be using the TFSA”?
My view is that the TFSA is suited to anyone who has investment assets outside of their RRSPs.
The TFSA serves as an ideal source of emergency funds; it can be used for a major purchase, or as a source of post-retirement income.

Below are examples of clients who can all benefit from a TFSA in different ways.

Single Parent
Helen is a 35 year old single parent with two young children. Her employment income allows her to make investments, but due to her concern about expenses such as dentist bills, car repairs and house renovations, she cannot undertake a long-term investment approach.
By establishing a TFSA, Helen has the same investment choices as under a non-registered investment portfolio, but she now has the ability to make tax-free withdrawals. In addition, Helen is able to re-contribute these amounts to the TFSA at a later date as the withdrawals are added to her contribution room in the following year.

One-Income Family
Jacques and Marie are in their mid-40s. Jacques is a contractor while Marie is at home with their three children. As Jacques is the primary income-earner, he is taxed on most of the family’s employment and investment income. For several years, he has been contributing to a spousal RRSP for income splitting purposes. With additional funds to invest, he is looking for more income splitting opportunities.
The TFSA provides additional income-splitting. Every Canadian resident who is 18 years of age or over will have $5,000 of annual TFSA contribution room, even if the individual has no employment income. Thus, both Jacques and Marie each have TFSA room commencing in 2009, and will generate additional amounts of room thereafter. As the attribution rules applicable to non-registered investments do not apply under TFSAs, Jacques can invest $5,000 in his TFSA and can make a $5,000 gift to Marie for investment in her own TFSA. Thus, through the TFSAs, the family now has tax-free growth on up to $10,000 for each year.

Young Employee
Leo is a 24 year old who has just started work after graduating from University. As an entry level employee, his marginal tax rate is quite low. Leo’s parents want him to start a regular savings program.
Leo knows that he can contribute to an RRSP, and that he can delay claiming the RRSP deduction until a future year when his marginal tax rate will be higher than at present. However, Leo might need access to these funds in the next two or three years for more education or to purchase a vehicle.
Instead of contributing to the RRSP right away, Leo should consider making contributions to the TFSA. While no tax deduction is available, if he needs the funds in the next few years, he can withdraw these amounts tax-free.
Leo may decide to make a withdrawal from the TFSA in the future when his marginal tax rate is higher, and use the withdrawal to make an RRSP deduction. The tax refund could be used to make another RRSP contribution or as a contribution to the TFSA.

Recipient of RRIF Income
Moses is 74 years old and receives minimum RRIF payments. Moses’ pension, CPP, OAS and investment income can pay for his lifestyle expenses, and thus he does not require the RRIF payments. Moses has been investing the after-tax RRIF payouts into non-registered savings.
Moses is concerned that as the RRIF minimum amounts increases each year, the increased RRIF income and his investment income will at some point make his OAS payments subject to the “claw-back”.
Moses should consider investing the after-tax portion of the RRIF payments into the TFSA. By doing so, future investment income will grow inside the TFSA on a tax-free basis. If Moses needs to supplement his income by making withdrawals from the TFSA, not only are the payouts tax-free, but the TFSA withdrawals do not have any impact on the OAS claw-back.

Frequently Asked Questions

General
1. Is the TFSA like a bank account?
No, the TFSA is a savings plan that allows individuals to use the TFSA for a variety of investment purposes including retirement.

2. If a client is age 18 but lives in a province or territory where the age of majority is 19, can I still set up a TFSA for the client?
Yes. Parental signature is not required.

3. Which products will be held in a TFSA?
Most investment products are eligible including mutual funds, GICs, TCA, and securities.

Contributions
1. Can a person contribute to the TFSA of the person’s spouse?
No, however, the person can make a gift of an amount to the spouse to allow the spouse to contribute to a TFSA.
The investment income (interest, dividends, capital gains) that is generated within the TFSA would not be subject to the normal “attribution” rules. While a withdrawal from the TFSA would not be taxable, subsequent investment income earned outside the TFSA would be subject to the attribution rules.

2. After 2009, how will a person determine his or her contribution room?
Starting in 2009, and if the individual files a federal income tax return, the CRA will advise the individual of the TFSA contribution room each year, as it already does with respect to RRSP contribution room. Contribution room becomes available on the 18th birthday.

3. Can an individual contribute to both a TFSA and an RRSP?
Yes, many individuals will contribute to both the RRSP and the TFSA. A contribution to a TFSA does not affect RRSP contribution room, and vice versa.
An excellent planning strategy for many individuals is to contribute to the RRSP, then invest the tax refund that was generated by the RRSP deduction into the TFSA.

4. Can a client use RRSP assets to make a TFSA contribution?
Yes, but not on a “tax-sheltered” basis, as the amount withdrawn from the RRSP is considered to have been de-registered. Taxes will be withheld at source, a T4RSP will be issued (plus a Releve 2 for residents of Quebec), and the client will have to include the amount de-registered as income on his or her tax return for the year.

5. Can an individual “park” money in a TFSA, withdraw this amount to make an RRSP contribution, then contribute the tax refund into the TFSA?
Yes, the amount withdrawn from the TFSA will be added to the individual’s TFSA contribution room in the following year. This may mean that the individual may need to wait until the following year to make the “re-contribution”.

Example:
In 2009, Hazel contributes $5,000 to her TFSA. On January 2, 2010, assuming no indexing of the contribution limit, Hazel contributes an additional $5,000 to her TFSA, and has now maximized her TFSA contribution limit for 2010.
On February 15, 2010, Hazel decides to make an RRSP contribution for the 2009 tax year but has no cash, so she withdraws $3,000 from her TFSA to make the RRSP contribution. After filing her 2009 tax return, she receives a refund of $900.
Hazel cannot re-contribute the $900 tax refund to her TFSA in 2010, as her 2010 limit has already been maximized. However, assuming no indexing, Hazel will be able to contribute the $900 to her TFSA in 2011, as her TFSA limit for 2011 will be $8,000 – i.e. the annual $5,000 allotment plus her 2010 withdrawal of $3,000.

Withdrawals
1. Can a TFSA withdrawal be made at any time?
Yes, the owner of a TFSA is allowed to withdraw funds from a TFSA at any time and for any purpose. Redemption fees may apply.

2. Will withdrawals from a TFSA affect the person’s government benefits?
This will depend on the government program in question.
TFSA assets and withdrawals will not affect eligibility for any federal “income-tested” benefits or tax credits, such as the age credit, the Canada Child Tax Benefit, the GST credit, the Working Income Tax Benefit, Old Age Security benefits, the Guaranteed Income Supplement, and Employment Insurance benefits. However, if the individual is receiving provincial or territorial benefits, in which eligibility is based in part on having “assets” or “income” below certain thresholds, it is possible that the program in question may count TFSA assets against the “asset” limit and/or that TFSA withdrawals may count against the “income” limit, and reduce eligibility for those benefits accordingly. The person should check with the program.
Several provinces have stated that TFSA income will not be subject to provincial taxation, but none of them have made any announcements with respect to social assistance programs.

3. Do withdrawals come first from contributions, then from the TFSA investment income?
Withdrawals are not categorized as coming from “contributions” or from “income”. TFSA withdrawals are not taxable. Each amount withdrawn from a TFSA is added to the TFSA owner’s contribution room for the following year on a dollar-for-dollar basis.
Thus, the investment growth on TFSA contributions that is withdrawn can be re-paid to the TFSA.

Example:
Bill contributes $2,000 to a TFSA in January 2009, and this grows in value to $2,200 by December 2009.
Bill withdraws the entire $2,200 from the TFSA in December 2009.
Bill’s TFSA contribution room for 2010 is equal to $10,200, which is the sum of the following:
$3,000 of unused room from 2009, plus
$5,000 of room generated for 2010, plus
$2,200 of withdrawals made in 2009.

4. If a client contributes $5,000 to a TFSA on January 2, 2009, can he or she withdraw it right away?
Yes, withdrawals can be made as soon as a contribution has been made to a TFSA and the cheque has cleared. (Redemption fees may apply to the withdrawals).

Issues at death
1. Can the TFSA holder designate a charity to receive the TFSA proceeds upon death?
Yes, a charity could be a beneficiary. The payment of the TFSA proceeds at death to a registered charity is considered to be a charitable gift made by the TFSA owner so that a donation receipt in the name of the TFSA owner will be issued by the charity to the executor/liquidator of the estate. The executor/liquidator can then claim a charitable donation credit on the tax return of the deceased owner for the year of death, or in some cases, the year prior to the year of death.
In common-law jurisdictions (i.e. provinces other than Quebec), provincial or territorial legislation has not yet been updated to allow for beneficiary designations under TFSAs. The owner of the TFSA may wish to name the charity as the beneficiary of the TFSA by updating his or her will until such time as provincial or territorial legislation has been updated to allow for such designations under the TFSA.
If you are a resident in the Province of  Quebec, you must confirm your wishes to make the charity the recipient of the TFSA by way of a bequest in the will.

2. If the TFSA is ultimately transferred to a non-spouse recipient, does the TFSA maintain its tax-free status?
No, the TFSA would have to be wound up. The value of the TFSA at death would be paid to the recipient on a tax-free basis. However, any investment income earned after the date of death would be taxable to the recipient of the TFSA funds. (Please note that the dividend tax credit and the 50% capital gains inclusion would not apply with respect to this income). If the recipient has TFSA contribution room, the recipient can use this inheritance to make a contribution to a TFSA.

3. What is the difference between designating a spouse as a “successor holder” or a beneficiary?
When the surviving spouse or common-law partner is designated as the “successor holder” the spouse simply becomes the new owner of the TFSA.
When a spouse is designated as a beneficiary, the TFSA is wound up and the assets are either transferred to the TFSA of the surviving spouse or common-law partner or paid out to the spouse/common-law partner.

4. Can a non-spouse recipient be a “successor holder”?
No, a non-spouse recipient must receive the proceeds of the TFSA as a cash payment.

5. If the estate is the recipient, will normal probate fees apply?
In common-law jurisdictions, the TFSA investments will be an asset of the estate. Whether probate fees will apply will depend on whether or not the executor is obliged to seek probate to gain access to this asset or other estate assets.

Non-residency
1. A client is a U.S. citizen who is a resident of Canada for tax purposes. Are there any U.S. tax implications if contributions are made to a TFSA?
A U.S. citizen is required to file a U.S. tax return. (This also applies to “green card” holders). While the tax treaty between Canada and the United States will allow a US tax filer to defer the tax on income earned inside an RRSP or a RRIF, it appears that this tax deferral will not apply to investment income earned inside a TFSA. This would mean that the TFSA investment income would be taxable income for US tax purposes and thus would have to be reported on the client’s US tax return. This information can be obtained from their quarterly statements.

2. If a TFSA holder leaves Canada on a permanent basis, does the TFSA have to be redeemed?
No, even if a person leaves Canada, he or she can retain the TFSA. When the person decides to make a withdrawal from the TFSA, there will be no withholding taxes applicable.
While the person will not be taxed in Canada on the investment income earned by the TFSA, this income might be taxable in the person’s country of residence. Similarly, the withdrawals made from the TFSA may be taxable in the country of residence.

3. Can a non-resident client continue to make contributions to the TFSA?
Yes, however, this is not recommended as a special penalty will apply with respect to any TFSA contributions that are made by a non-resident. This penalty, which is assessed on a monthly basis, is equal to 1% of these contributions, or 12% per annum. In addition, if this contribution is an excess amount, the normal monthly excess contribution penalty will apply. Please note that the investment income with respect to these contributions may be subject to taxation in the person’s country of residence.
A non-resident does not generate any new TFSA contribution room under the normal “annual allotment rules”.

Hope this helped clarify.