Today, we are reviewing the Tax-Free Savings Account (TFSA) which is very terribly named because you should ABSOLUTELY not use it for savings, but for INVESTING.
Who can contribute
You have to be 18 to contribute.
What’s your contribution room
It started in 2009 and up until 2020 you have $69,500 in contribution room if you haven’t contributed any money AT ALL.
The contribution room for 2020 is $6000.
The contribution room is the same for everyone and not based on your income (that’s the Registered Retirement Savings Plan – RRSP).
You can only contribute up to your annual limit (e.g. $6000).
If you’re transferring investments, they will take the market value of your investment and use it towards the contribution room, not the book value.
If you go over, you are taxed 1% for every month (including the contribution month) that you over-contributed, until you remove the overage.
If you don’t remove the overage it is deducted from next year’s contribution room.
All contribution rooms stay OPEN and don’t disappear if you don’t contribute.
You can check your contribution room using the Canada Revenue Agency (CRA) website and here is how you register.
When do I get taxed?
This is tax-sheltered meaning you pay taxes on the money you put into it now, but any money you contributed you can then take out will be tax-free, including all capital gains, dividends etc.
What can I use it for? NOT SAVINGS PLEASE
You can use it to invest in mutual funds or stocks with, not just for savings.
What happens if I die?
There are two titles for your spouse OR common-law partner: Successor Holder or Beneficiary.
Everyone else who is not your spouse OR common-law partner is a Beneficiary.
It transfers to ONLY your spouse or common-law tax-free IF they are listed as the SUCCESSOR HOLDER.
Only your spouse OR common-law partner can be a SUCCESSOR HOLDER. You can read about it here.
If your spouse is named BENEFICIARY, then it can be transferred to them tax-free before December 31st of the year following your death and ALL capital gains (market value minus book value) will be taxable.
IN QUEBEC – you cannot name a beneficiary or successor holder to your RRSP or TFSA, only to your RESP
Little Quirk. Quebec doesn’t allow this.
I am only allowed to name Little Bun as the beneficiary on his Registered Education Savings Plan (RESP).
You need to name beneficiary and successor holders in your trust / will.
So let’s say you died in August 2020 with $80K but then it is worth $82K
Sucessor Holders pay $0 in taxes on the full $82K they get.
Beneficiaries can transfer the TFSA tax-free to themselves if it is done BEFORE the end of the calendar year following your death – so in this case, I am reading it as December 31st 2021 and will only pay capital gains tax (25%) from the date of your death until the date they obtain the account. You can read so much more about it here and the official CRA page is here.
They will get that $80K, and have to pay capital gains tax on the $2K that accumulated from the time you died until they got the money.
If you die and it goes to your estate, you have to pay probate fees and it is taxable for any capital gains (25%) from the date of your death until the date the beneficiaries obtain the account.
You can have as many TFSA accounts as you wish.
I have multiples because I opened one, then another and never combined them.
No big deal, really unless you have to pay fees if your accounts are multiples with very small amounts, then it might be wiser to combine it all.
When you withdraw the money you cannot recontribute back in the same calendar year.
You must wait until the following year January 1st to contribute what you took out plus to get the new contribution room.
Withdraw $10K on March 2020
Have to wait until January 2021 to put back $10K and another $6K available doe 2021 to contribute