Giorgos asked an interesting question in the Tax Free Savings Account (TFSA) thread about how the contribution room of the TFSA will be calculated if there are gains in the account. Basically, if you invested the $5,000 maximum in the first year and luckily turned a quick profit and withdrew the money, what would would be the new contribution room? The answer surprised even me.
Here is the question again:
Lets say you put $5k into your TFSA, and you decide to invest them in some crazy options strategy (with a 1% of actually happening). Things happen the way you wanted and you end up with a total account value of $100k. What’s going to happen to the gains? Your capital gains are tax free, but your contributions space is already full. Question is, where does the $95k go? Do they let you keep those money in your TFSA, because they are from capital gains. What if I withdrew the money, what is the contribution room then?
I think that it may be safe to assume that all gains can remain in the TFSA (investment account) without any penalties. The interesting question is the last one, what happens to the contribution room if the account is liquidated? Coincidentally, I was browsing through the local newspaper, and a reader had a similar question for a financial advisor columnist (can’t remember his name).
The column stated (confirmed by Ed Rempel) that any amount withdrawn from the TFSA is available as new contribution room for the next year! In the above scenario, if the $100,000 is withdrawn from the account, then $105,000 contribution room is now available for next year. Personally, I would have assumed that only $5,000 would be available to be re-contributed, but this is a welcomed surprise. However, the reverse is also true. If you contribute/invest $5,000 to your TFSA which results in a loss of say $4,000. If the remaining $1,000 is withdrawn, then the contribution room for the next year is $6,000.
This contribution room tidbit of information makes the TFSA even more attractive than it already was. Personally, when the TFSA becomes available, I will more than likely be using it as an investment account instead of an emergency savings account. I will be writing more on some my potential TFSA strategies in another post.