Now that you have set up a Tax-Free Savings Account (TFSA), there are many rules that govern how much can you contribute, how often you can contribute, and various restrictions.
Basically, contributions into a TFSA are categorized into three categories:
The rules that govern these contributions are outlined in the following sections.
Beginning in 2009, every individual resident in Canada 18 years of age or older, began to automatically accumulate TFSA contribution room. Even those individuals that have not opened a TFSA account have still accumulated TFSA contribution room each year since 2009. Contribution room initially accumulated at the rate of $5,000 per calendar year (This was increased to $5,500 per year in 2013 and $10,000 in 2015, but reduced back to $5,500 for 2016).
Below is a summary of contribution basics:
Note: When your contribution is in the form of an investment from a personal taxable account, the Canada Revenue Agency (CRA) views this a deemed sale. As a result, even though you still own the investment in your TFSA, the CRA will require you to report the contribution as a sale in your income tax return. If you have a deemed capital gain, then the taxable portion will be included in your taxable income. If you have deemed capital loss, you are not permitted to use the loss to reduce tax payable on capital gains (past, present, or future).
The CRA will calculate and report your contribution room each year on your Income Tax Notice of Assessment or Reassessment. (If you are not required to file an annual income tax return, you will not receive a Notice of Assessment. In this case, you should keep track of your unused TFSA contribution room to ensure that your contributions are not classified as over-contributions and, thus, assessed a penalty tax.)
To calculate your unused TFSA contribution room, add the following three items together:
Example: If you opened a TFSA account for the first time in 2013 with a contributed of $5,000.00 and a $3,000.00 contribution in 2014, and withdrew $4,000.00 in February 2015, your unused TFSA Contribution Room available for 2017 is calculated as follows:
|Unused TFSA Contribution available beginning of 2013||$20,000.00|
|Plus: New 2013 contribution room||+$5,500|
|Less: Contributions made in 2013||-$5,000|
|Unused TFSA Contribution available beginning of 2014||$20,500.00|
|Plus: New 2014 contribution room||+$5,500|
|Less: Contributions made in 2014||-$3000|
|Unused TFSA Contribution available beginning of 2015||$23,000.00|
|Plus: New 2015 contribution room||+$10,000|
|Unused TFSA Contribution available beginning of 2016||$33,000.00|
|Plus: New 2016 contribution room||+$5,500|
|Plus: Amount withdrawn in 2015 added back in 2016||+$4,000|
|Unused TFSA Contribution available beginning of 2017||$42,500.00|
|Plus: New 2017 contribution room||+$5,500|
|Unused TFSA Contribution available in 2017||$48,000.00|
Note: The unused TFSA contribution room is not increased for withdrawals of deliberate over-contributions, prohibited investments, non-qualified investments, or amounts attributed to swap transactions.
When you withdraw previous contributions from your TFSA and then redeposit the withdrawn funds, this redeposit is called a re-contribution. With a TFSA account, you can withdraw a portion or all of the funds held at anytime. There are no restrictions on the amount withdrawn or the frequency of withdrawals.
The only restriction on re-contributions is that they cannot be made in the same calendar year as the withdrawal. For example, if you withdraw $5,000.00 in May, you cannot re-contribute the withdrawn $5,000.00 until the following calendar year.
All TFSA withdrawals are added to your unused TFSA contribution room for the following year. Because the withdrawn funds will not be accounted for until your TFSA assessment is calculated at the end of the year, your current year’s withdrawals are not included in your current unused TFSA contribution room and any re-contribution will result in an over-contribution.
This restriction is to permit the tracking of your total contributions so that you do not over-contribute to your TFSA account in any given year.
In general, an over-contribution occurs when you make a contribution to your TFSA account that exceeds your unused TFSA contribution room for that calendar year.
Over-contributions to a TFSA account are not permitted and the Canada Revenue Agency (CRA) assesses a penalty tax on all over-contributions.
For more information on the tax penalties assessed for over-contribution amounts, refer to the section TFSA–Taxes Payable.