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The column stated (confirmed by Ed Rempel) that any amount withdrawn from the TFSA is available as new contribution room for the next year!  In the above scenario, if the \$100,000 is withdrawn from the account, then \$105,000 contribution room is now available for next year.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  If the remaining \$1,000 is withdrawn, then the contribution room for the next year is \$6,000.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.

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### 119 Comments

1. MultifolDream\$ on November 6, 2008 at 9:30 am

Thanks for the posting. For me it makes it makes a lot of sense, but let see whether it will work exactly like this.

2. q on November 6, 2008 at 10:20 am

It is better to pose the question with a more mainstream example e.g. Contribute \$5000 in an interest bearing account. After a short while you have \$5125. You withdraw \$5100 and leave \$25. In the next year you can recontribute \$5100 and another \$5000. True or False?

I have been curious about this scenario since the original announcement bcause (given that you manage the rest of your investments properly) the TFSA seems like the place to put the investment (satellite) with the most upside. In the short term the relatively low contributions tend to hamper efficiency and flexibility but as time passes and the sums accumulate this should be a powerful tool.

3. Four Pillars on November 6, 2008 at 10:26 am

I hope the next post explains how to find that investment that goes up 100 times! :)

4. Dave on November 6, 2008 at 10:42 am

FT, I know that there was a discussion in the past whether RRSP contributions or an accelerated smith maneuver plan was superior. I seem to remember that the smith maneuver came out on top. Assuming interest deductions on leveraged investments in TFSA’s are not allowed, I’m interested in the relative merits of RRSP’s, TFSA’s and smith maneuver interest deductions.

5. DBennett on November 6, 2008 at 11:13 am

I read this the other day in the Telegram as well I believe.

This is a very interesting component of the TFSA. It looks like it opens up the idea of using the TFSA as a derivative or high risk investment account. That way, if you gain money, you can switch over your taxable investments. I would imagine that for millionaire Canadians (multi-millionaires), they may hire someone to do speculative investing to increase their TFSA room and switch over their taxable investments.

6. Bob on November 6, 2008 at 11:59 am

I have another question. If you contribute \$5000 in Jan, but then need to withdraw \$3000 in March, can you recontribute that \$3000 later on in the year, or do you have to wait until next year when you can contribute \$8000?

7. Xenko on November 6, 2008 at 12:06 pm

“It is better to pose the question with a more mainstream example e.g. Contribute \$5000 in an interest bearing account. After a short while you have \$5125. You withdraw \$5100 and leave \$25. In the next year you can recontribute \$5100 and another \$5000. True or False”

True. You could contribute \$10,100 the following year.

“I have another question. If you contribute \$5000 in Jan, but then need to withdraw \$3000 in March, can you recontribute that \$3000 later on in the year, or do you have to wait until next year when you can contribute \$8000?”

You would have to wait until the following year to re-deposit the \$3,000 dollars. If your example was in 2009, then in 2010 you would have \$8,000 of contribution room (\$3,000 from withdrawals and \$5,000 from new contribution room).

8. FrugalTrader on November 6, 2008 at 12:07 pm

q: true, afaik.

Dave, we have done an analysis of TFSA vs RRSP, and the TFSA came out on top if you account for clawbacks as a senior.

DBennett, note that when you transfer taxable investments they are deemed sold. Thus, if there is a gain, there will be a capital gains tax.

Bob, afaik, you will have to wait until the next year to make the contribution.

9. nobleea on November 6, 2008 at 12:27 pm

That’s how I read the information.

I plan on splitting my TFSA up between the emergency fund cash savings, and high risk gambles.

They should almost have a contest to see who can get the highest TFSA value in a set period. It would work well since everyone is starting at the same time and everyone has the same contribution room.

10. FrugalTrader on November 6, 2008 at 12:43 pm

Nobleea, that is a great idea. Perhaps I’ll instigate a friendly competition between MDJ readers?

11. Tom on November 6, 2008 at 1:18 pm

Any word on how dividends / distributions will be handled? Are these accounts setup to shield investors from strictly capital gains?

12. BCGameDeveloper on November 6, 2008 at 1:35 pm

I noticed recent posts about holding companies and 750000 capital gains deductions for business owners who hold private shares for a period of time. So I have a related question.

Suppose I were to start a company. When that company is in its infancy its shares have little value. Would it be possible to put all those private company shares into a TFSA? If the company was successful and I was able to sell it for a profit, I could see considerable gains…

Anyone have knowledge on this?

13. Finance_Addict on November 6, 2008 at 1:49 pm

If gains made in a TFSA in fact expand the contribution room I expect this to quickly be modified to no longer allow this. I hope I’m wrong. Government will quickly lose out on capital gains and interest income tax and will be forced to modify this.

Just so I understand this correctly. Using your example…does than mean in the 2nd year alone any capital or interest income gains from a 100+K TSFA account balance would not face any taxes?

14. nobleea on November 6, 2008 at 1:59 pm

^ Yes, that’s the whole idea, isn’t it?
It’s supposed to be an savings vehicle to the RRSP with a little more flexibility. If the gov’t just wants it to be a true savings account where we get little to no interest, why even call it Tax Free? Since the money going in has already been taxed.

Contribution room doesn’t expand. It’s always 5K a year, or a bit more depending on the indexing. If you take money out, you’ll be able to put more in the next year, but that’s not really contributing. It’s more like redepositing.

15. blaze spinnaker on November 6, 2008 at 2:02 pm

Hmmm,

Well, I have a new public company folks. Everyone contributes 5K, I’ll buy back all the shares until its worth 100x what we spent, and then you all withdraw your money from your TFSA and give it back to me!

Crazy.

16. Finance_Addict on November 6, 2008 at 2:12 pm

re nobleea: Thanks. Your right it would be like redepositing. I assumed we could only put in at most 5K a year. Now I understand that if we removed any gains we could put those gains back in again. Wow! I really like the potential tax savings of this account if we are fortunate enough to make significant gains early on and essentially expand the account.

I am still skeptical that at some point the rules will change in their favor. We have many related examples of this.

17. QCash on November 6, 2008 at 2:48 pm

The long term effect of the TFSA will be to eliminate capital gains as a source of revenue for the government.

The Tories promised in 2006 to exempt capital gains if they were reinvested within a set amount of time.

The TFSA is going to accomplish this over the long run and eventually investment income is going to be sheltered from the tax man.

Between RRSPs, RESPs, TFSA, it should be possible to earn a lot of investment income with minimal tax implications.

Q

18. Jordan Clark on November 6, 2008 at 2:53 pm

Very interesting idea, I guess this would lead to a strategy where any time your TFSA makes an annual gain you would be best to sell and transfer everything out at the very end of the year to “crystallize the gains”, therefore increasing your fixed contribution room and repurchasing at the beginning of the next year.

Of course if you lost money you wouldn’t withdraw because that would shrink the available room.

19. James on November 6, 2008 at 2:54 pm

It should be interesting when it comes time to open a TFSA. My question is, can you have more than one account at different institutions?

And having just done an intro course to taxation, and seeing how much the tax code gets re-written each year because of ‘loopholes’ I can’t see this getting too out of hand.. unfortunately. I as well, hope I’m wrong.

20. Phillip on November 6, 2008 at 2:55 pm

My understanding is that the yearly contribution is independent from what contribution room you create when you withdraw. So all things being equal, you can put in \$5000 each year regardless of what you did or didn’t take out. Anything you earn inside is not subject to tax and you can withdraw as much as you like whenever you like. The *following calendar year*, in addition to the regular \$5000, you can also contribute the same amount as what you withdrew previously – be it \$2000 or \$10000. You are in effect allowed to bring your total back up to the total amount you had in there the previous year before you withdrew it, plus another, new \$5000.

21. nobleea on November 6, 2008 at 2:58 pm

Jordan Clark;

What benefit would you have to withdraw everything and ‘crystallize the gains’? I can’t think of one. The money withdrawn would then have it’s gains taxed if you invested it outside of the TFSA so that’s pointless. Re depositing it the next year wipes out your massive ‘contribution’ room. In fact, you’d be paying tax on whatever the withdrawn amount generates in interest or capital gains between when you withdraw it and put it back in.

A lot of people seem to think withdrawing and then redepositing somehow magically increases your contribution room. It doesn’t. It’s a zero sum game. It’s like saying I’ll give my salary back to my company. And when they pay me back, I’ve doubled my money!

22. Murph on November 6, 2008 at 2:59 pm

I would imagine that a TFSA will work like an RRSP with respect to having different accounts at different institutions. My RRSP is divided between two places, and its my responsibility to ensure my contributions don’t exceed my limit. I understand that there will be an over-contribution penalty, just like an RRSP, and we will get a yearly contribution space update with the tax assessments.

23. Vance on November 6, 2008 at 3:16 pm

I am definitely not a money expert, but it seems to me like a smart fella without a mortgage or any major debts would put his savings for the year in an rrsp and then put the tax refund into the tfsa. Does that make sense?

24. Jordan Clark on November 6, 2008 at 3:21 pm

Nobleea: Yeah after I thought about it I see you are right. I was thinking if you locked in the gains you would be able recontribute up to that upper limit if there was a lose of value in the following year. But I see now it’s a contribution limit, not a value limit!

25. nobleea on November 6, 2008 at 3:29 pm

Vance;

That makes sense. There are likely few people who have no mortgage or debts. You’d have to be earning quite a bit for it to work out, over 70-80K I think. That way your tax refund would match or exceed the TFSA contribution, and you wouldn’t be overcontributing to your RRSP.

26. Al on November 6, 2008 at 4:17 pm

Jordan Clark, Nobleea,

After reading your comments, I think I can see the reason why they set things up the way they did. Lets say I invest my \$5K and double it that year to \$10K. My old beater of a car dies so I need the \$10K to replace it. If I only got \$5K contribution room back when I remove the full \$10K I might hesitate. This way I can pull the money and replace it as I can without losing the contribution room I created through my smart investing.

27. cannon_fodder on November 6, 2008 at 6:03 pm

When you look at global stock markets which have been beaten up pretty badly, I think the winning contest strategy is to go on margin to buy options for those brand new ETFs which move at 3x the underlying sector. My \$5,000 could translate into 50, 100, 300x leverage!

j/k

28. Jasper on November 6, 2008 at 6:15 pm

Several comments mention that you can’t recontribute money withdrawn within the same year. I think it’s the Royal Bank that mentions that stipulation on their TFSA account, but no other financial institution I came across do, nor did I see mention of it in the tax code or the TFSA pamphlet. Can anyone shed light on where they found this limitation?

29. mjw2005 on November 6, 2008 at 6:16 pm

let me know how you do cannon…..

I think the TFSA is great especially for us non-salaried self-employed people who have very little taxable income but still cash around to invest in a tax sheltered account….

Don’t know if the general public will use it, but I will…

30. q on November 6, 2008 at 6:27 pm

mjw

have a look at answer #4 in this link http://www.cra-arc.gc.ca/gncy/bdgt/2008/txfr-eng.html#q4

q

31. blaze spinnaker on November 6, 2008 at 6:29 pm

actually, this does raise an intersting point.

Given the tax shelter the TFSA can potentially provide, perhaps investing in a highly leveraged fund does make sense!

The downside is you use 5000. The upside, is that you gain from 5-20K in capital gains tax free shelter.

32. Jasper on November 7, 2008 at 12:34 am

@30
Thanks Q, that answers my question. Interesting though, because that means shifting money from one TFSA provider (or TFSA account with the same provider) to another can only be done by withdrawing the money at the end of the year and not moving it to the second account until the new year? (Unless there will be transfer options like there exist for RRSPs).

33. Tiffany on November 7, 2008 at 2:47 am

Interesting post. I actually researched a little further and discovered that the you cannot recontribute the gains. The gains are tax free when withdrawn but your contribution, much like an RRSP limit, are capped. So if you put in \$5000, made \$100,000, your maximum contribution the next year would be \$10,000 (\$5000 from the year before that you’ve withdrawn and an extra \$5000 for the new year).

There is also a stipulation that after any withdrawal you are ‘suspended’ from making further contributions until the following year but you don’t lose your limits. So if you only contribute \$3000 in 2008, your new limit for 2009 would be \$8000 (\$5000+\$300). This works a lot like the unused contribution room for RRSP.

34. Tiffany on November 7, 2008 at 2:48 am

Interesting post. I actually researched a little further and discovered that the you cannot recontribute the gains. The gains are tax free when withdrawn but your contribution, much like an RRSP limit, are capped. So if you put in \$5000, made \$100,000, your maximum contribution the next year would be \$10,000 (\$5000 from the year before that you’ve withdrawn and an extra \$5000 for the new year).

There is also a stipulation that after any withdrawal you are ‘suspended’ from making further contributions until the following year but you don’t lose your limits. So if you only contribute \$3000 in 2008, your new limit for 2009 would be \$7000 (\$5000+\$2000). This works a lot like the unused contribution room for RRSP.

35. Tiffany on November 7, 2008 at 2:49 am

Correction – I mistyped.. if you contribute \$3000 in 2008, your new limit for 2009 would be \$7000 (\$2000+\$5000)

36. FrugalTrader on November 7, 2008 at 7:05 am

Tiffany, do you have any sources? The information that I have posted is from 2 financial advisors.

37. q on November 7, 2008 at 7:46 am

Jasper @32

Transfers would not be the same as withdrawals. See #4 in the is link
http://www.cra-arc.gc.ca/tx/bsnss/tpcs/tfsa-celi/qstns-eng.html

q

38. Freedom45 on November 7, 2008 at 9:57 am

Along the lines of what blaze spinnaker was saying:
– I have a consulting corporation
– I invest in my corporation through my TFSA
– I pay myself through the TFSA investment (e.g. dividends) and don’t get taxed

Currently I draw a salary with the option to pay myself dividends – both of which are taxed. I don’t see why my wife couldn’t do this too – now that’s income splitting!

As long as I pay a fair amount for the corporation shares in the TFSA is this ok? Does my corporation have to be public? Is this one of those loopholes that will be closed with new legislation? What am I missing here?

39. q on November 7, 2008 at 10:18 am

answer #9 gives a hint but not a definition
http://www.cra-arc.gc.ca/gncy/bdgt/2008/txfr-eng.html#q9

In any case given the existing small business dividend tax advantage I wonder whether there is not something better to shelter

40. Four Pillars on November 7, 2008 at 10:41 am

A financial advisor is the last person I would ask about TFSA rules!

Tiffany – the gov’t of Can website is pretty clear that any withdrawals during the year are added to the next year’s allowable contribution amount. There also is no ‘suspension’ of withdrawals – you can withdraw any part of your TFSA any time in any amounts. The only potential limitations will be placed by the financial institution – not the gov’t.

http://www.cra-arc.gc.ca/gncy/bdgt/2008/txfr-eng.html#q4 – covers how withdrawals affect allowable contribution room

http://www.cra-arc.gc.ca/gncy/bdgt/2008/txfr-eng.html#q7 – covers withdrawals

41. FearLES on November 7, 2008 at 12:34 pm

I know we are talking about the government here but logically it sounds more like is you are always limited to \$5000/year (excluding the inflation adjustments) and this won’t go up.

ex.
A) you invest \$5000 in the TFSA and make \$100k, you take out \$5000 freeing up \$5000 contribution room in the next year to make \$10,000 of contribution room.

B) if instead of taking out \$5000 you take out \$50,000, you will only free up \$5000 of contribution room for the next year.

A and B will have the same result except that in B if you want to reinvest you will have \$45,000 that can no longer be sheltered from taxes.

42. BCGameDeveloper on November 7, 2008 at 1:08 pm

The rules about what can be invested (in terms of private shares) are the same as RRSP rules defined in the following link:

http://www.cra-arc.gc.ca/E/pub/tp/it320r3/it320r3-e.html#P104_10802

See sections 6 through 8.

Also the rules around withdrawls are defined in the government budget document:

http://www.budget.gc.ca/2008/pamphlet-depliant/pamphlet-depliant2-eng.asp

Here is one example where withdrawl of gains can be recontributed (as stated in the document):

Full Flexibility to Withdraw and Re-contribute
Gillian saves \$3,000 a year for 10 years in a TFSA. She decides to start a small business and withdraws \$40,000 of her TFSA savings, tax-free. Later, Gillian decides to re-contribute the \$40,000 to her TFSA. She may do so without reducing her other available contribution room.

43. mjw2005 on November 7, 2008 at 4:32 pm

I believe Fearless is incorrect and Frugaltrader and four pillars are right….according to the CRA any withdrawals from the TFSA can be recontributed at a later time…so if in ten years you have mad 100k in gains…then take it out…you could recontribute the entire 100k at a later time….

Simple and easy….

Again I believe most people will barely use this account so hopefully the government will not muck with these generous rules….

44. Acorn on November 7, 2008 at 4:32 pm
45. Four Pillars on November 7, 2008 at 4:49 pm

Pay mortgage to yourself.

Could be an interesting idea – you’d have to wait a few years though for the contribution room to get large enough to make it worthwhile.

Mike

46. blaze on November 7, 2008 at 6:27 pm

@freedom45:

http://findarticles.com/p/articles/mi_m0OJX/is_/ai_n25084277

my proposal was pure tax avoidance. would certainly get you in hot water if you were caught. I strongly advise people not to do anything illegit because in the end you will get caught.

i just find discussing rule gaming interesting.

47. blaze on November 7, 2008 at 6:32 pm

@mjw:

everyone will max their tfsa. Anyone who doesn’t is an idiot!

I guess the question is how easy you can withdraw/re-contribute. If it becomes smooth enough this will be everyones savings account.

48. DAvid on November 7, 2008 at 11:11 pm

Blaze,
A LOT of Canadians do not have an extra \$420 /month to put in a savings account, tax free or not. By your account all those hard working folk are idiots? Probably not.

DAvid

49. cannon_fodder on November 8, 2008 at 6:08 pm

Blaze,

Right now there are people getting mortgages around 6%. Let’s assume they have a choice of paying down their mortgage by an additional \$5,000 per year or putting it into the TFSA. Notwithstanding any emotional factor (debt reduction by paying down mortgage vs. savings cushion/retirement investing through the TFSA) the decision could come down to their net benefit.

Paying down the mortgage gives them an ironclad 6% return. I’m not aware of any way through the TSFA you can guarantee a 6% return. You could find some corporate bonds that pay more, but as we’ve seen recently, they are not guaranteed. It may be a safe enough investment, however, to justify the additional risk.

In more “normal” times I believe it would be unusual to find a very safe investment which would have a better return than paying down your mortgage. It doesn’t mean if you are willing to take on more risk (with perhaps a longer time horizon) you couldn’t come out ahead 9 times out of 10.

Now, for people like myself who obtained mortgages at a discount to prime (e.g. P – 0.75%) then it is very possible to purchase investments that have a favourable risk/reward ratio in excess of paying down the mortgage. I recently saw TD Bank bonds yielding in excess of 7%.

Just for laughs, I created this spreadsheet on Google docs which I hope illustrates that there are some cases where strictly investing in the TSFA is not the best move. I encourage anyone to critique my logic and/or math because I certainly could have made some mistakes.

http://spreadsheets.google.com/pub?key=peLqod9v5EUFa4LsWGSpXHw&output=html&gid=0&single=true

50. cannon_fodder on November 9, 2008 at 5:45 pm

Blaze et al,

Thanks to FT for his idea on how to improve the SS.

Thanks to DAvid for noting that I had published it but didn’t make it editable – oops!

HERE is the proper link so that you can play around with it for your own numbers.

http://spreadsheets.google.com/ccc?key=peLqod9v5EUFa4LsWGSpXHw

The math was too difficult (for me) to figure out the breakeven Marginal Tax Rate when dealing with dividend investments for more than 1 year.

Have fun…

51. blaze on November 11, 2008 at 5:16 am

Good point about the mortgage. I am not paying a mortgage right now, completely forgot about that world.

52. Money_Doofus on November 17, 2008 at 4:03 pm

OK, so here is my plan:
1) Put my savings for 2008 into the rrsp
2) Put the tax refund into the TFSA hi interestsavings account
3) Make bi-weekly contributions to the TFSA throughout 2009 until it reaches \$5000
4) Dump the contents of the TFSA into the rrsp next February
5) Repeat (with ever-expanding TFSA limits)
6) Continue this routine until I die and Will the to money to my 50 cats (no one my age will get to retire. Ever).
The end.

53. MTerry on November 27, 2008 at 3:09 am

Reading these posts is rather interesting; I wont bother to respond wtih posters names however hear are some corrections and facts I have researched:

If you loose money in your TFSA you don’t loose the contribution room however losses are not tax deductable.

Interest on money borrowed to put into a TFSA is not tax deductable.

You can’t have multiple TFSAs’ at various instituitions however you can register them for your children over the age of 18 and utilize them that way.

The TFSA will be indexed and the amount you can contribute will increase to 5500 in 2012 (I am pretty sure those numbers are correct). Regardless, it will be indexed.

Since the TFSA is not only tax free, it is also tax sheltered RRSP qualified; consider this: since RRSPs’ are actually tax deferment and not tax exempt; when you are ready in the future to draw on your RRSPs’. Here is an example; 6 years from now you would have 30,000 (minimum) available room transfer. Move 30,000 of your RRSP over to the TFSA and withdraw your money tax free. I have found nothing to say you can’t do this. Any accountants or tax lawyers in the room can correct me.

Here is another hint for any investors; since you are allowed to hold any form of security within a TFSA: how about those stocks you have in American comjpanies that don’t have the same tax advantages as Canadian stocks? Growth and/or dividends will both be tax free within your TFSA.

54. Jordan Clark on November 27, 2008 at 3:37 am

@MTerry

Where did you read that you can’t have multiple TFSA accounts at different institutions?

I believe as soon as you transfer money out of the RRSP (unless it is going into another RRSP account via a direct transfer) it’s going to be a taxable event and you’ll have to pay income tax on it.

55. MTerry on November 28, 2008 at 2:51 am

When you change the registration of your RRSP into at RRSP registered product within your TFSA, you have to pay aprox. 10% which is far less than income tax. Confirm the amounts with your account or financial advisor; I checked this information today with my advisor.

The question of multiple TFSA is on the government budget website where it states “Starting in 2009, Canadians aged 18 and older can save up to \$5,000 every year in a TFSA.” . Now, the TFSA can have multiple holdings at various institutions however, if the total combined deposits exceed the amount of your TFSA (\$5,000) the amount over the \$5,000 including any interest, dividends or gains would not qualify for TFSA status. You could split hairs and say that they are multiple TFSA accounts however they would all have the same registration number.

After saying all of that, it also states that; “Contributions to a spouse’s TFSA will be allowed . . . .”

As for effective “tax-free” RRSP withdrawl methods . . . .

That would be a coversation for another time.

56. MTerry on November 28, 2008 at 3:22 am

Cannon Fodder made a great comment that I will have to check on:

If options are classed as securities (which you are allowed to hold in a TFSA);
if you choose to exercise the option, are those shares now inside the TFSA?

Interesting applications . . . .

57. nobleea on November 28, 2008 at 12:34 pm

MTerry;

Yes, you can hold options in your TFSA, just as you can in your RRSP. If you choose to excercise your call options, you must have the cash available in the TFSA. The cash would have had to have been deposited in some for or another (cash or shares in kind) and would have been subject to the yearly contribution limit.

You also said: “When you change the registration of your RRSP into at RRSP registered product within your TFSA, you have to pay aprox. 10% which is far less than income tax.”

I don’t know what you mean by this. If you mean withdraw or transfer shares in kind from the RRSP to the TFSA, then yes, there will be a 10% hold back for revenue canada (since 5K or under). But the entire amount will get tacked on to your income and you will have tax due the following april. What you are suggesting is tax free in to the RRSP, then a small 10% tax going from RRSP to TFSA, then tax free coming out of the TFSA, and that is just not possible. Perhaps you mean something different.

58. MTerry on November 28, 2008 at 4:52 pm

Reply to nobleea:

The 10% is held back; you are going to re-register the withdrawl from your RRSP to a RRSP registered asset within the TFSA. Since the the original withdrawl is still sheltered within an RRSP they are not taxed. However, the funds are now within the TFSA and can be withdrawn without atracting tax.

This is how it was explained to me. Makes sense to me however it’s not like I’ve never been wrong before.

For me, the point is moot anyway since I find RRSPs’ to be effective as tax deferment; not a very effective retirement strategy if someone is willing to learn however better than nothing for those who don’t.

As for exercising a call option within the TFSA, there is no benifit since the total cost of the stocks you wish to purchase has to already be in the TFSA.

59. nobleea on November 28, 2008 at 5:07 pm

MTerry;

“The 10% is held back; you are going to re-register the withdrawl from your RRSP to a RRSP registered asset within the TFSA. Since the the original withdrawl is still sheltered within an RRSP they are not taxed. However, the funds are now within the TFSA and can be withdrawn without atracting tax.”

You’re going to have to provide a link for that. Otherwise that’s the biggest tax avoidance loophole I’ve ever heard of. You could fly a plane through it.
TFSA and RRSP are both registered plans. You can’t have an RRSP registered asset within a TFSA. The RRSP and TFSA are not assets that can be moved around. You can take out the stocks/cash that are in one plan and move them to another, but the government will get it’s income tax cut at some point.

60. MTerry on November 29, 2008 at 2:44 pm

Reply to nobleea

I have emailed my advisor the following:
“You mentioned the other day that RRSPs’ could be moved into a RRSP
registered asset within a TFSA and there would be a an aprox. 10% hold
back.
Do you have some documentation that states that you can hold RRSP
registered assets with the TFSA.”

Once I have a response from him I will post it.

To quote you: Otherwise that’s the biggest tax avoidance loophole I’ve ever heard of.”

You must not have heard of an “RRSP meltdown”. I know of one in which you can get ALL of your RRSP contributions out in one lump sum “tax free”. I put tax free in quotations because it’s not really tax free, it just doesn’t attract any tax.

I am not going to go back and forth validating comments here; It’s not the best use of my time, when I get a response I will post it.

61. MTerry on November 29, 2008 at 2:47 pm

Checking to see if I can set up a pm

62. MTerry on November 29, 2008 at 2:51 pm

If you want to contact me, click on my name.

63. TFSA-Experimenter on December 5, 2008 at 5:58 pm

Thought experiment:

Here is a scenario to potentially grow your TFSA space enormously. See if you can tell me where it fails. :-)

I am self-employed and have incorporated my business (it is a CCPC). I sell 5% of my company to a friend in shares. He is a resident of Canada and is arm’s length from me.

He puts my company shares into his TFSA in the new year, I then distribute dividends to that share class – say \$50,000 for him in total.

Before the end of that year, my friend withdraws the money from his TFSA, thus “opening up” greater contribution room for other investments. i.e. In the new year he could put \$55,000 (\$50K+\$5K for the new year) worth of blue-chip dividend-generating stock or what-have-you.

I have an accountant who has come back and said that CRA would attack it with GAAR (General Anti Avoidance Rules) and would disallow the dividends.

While I believe in my accountant (and he is probably going to read this entry), I would be interested to hear others’ ideas to this thought experiment. I haven’t been able to find anything in my web searches that would address this specifically.

64. nobleea on December 5, 2008 at 6:13 pm

Let me get this straight. Your company is worth \$100K (5% purchase of shares and a 5K contribution to TFSA). But then it’s going to have dividends of over 1,000,000\$/yr? (50K in dividends for a 5% share). How?

And even if you did somehow have dividends of 1million on a company worth 100K, why would he have to withdraw the money from his TFSA? It’s already cash sitting in there, he can just buy shares with it directly. No need to withdraw then recontribute.

65. TFSA-Experimenter on December 5, 2008 at 6:32 pm

Nobleaa – good points and I appreciate the attention to detail.

Let’s modify the numbers a bit (in my head I had the shares as being of a different class and so only they received dividends). It’s the concept that I’m interested in.

Regarding the withdraw – of course! Ack. That’s a brain fart on my side, agreed. I had in mind that they could pay me back the dividend money as the only reason we’d do this is to expand the TFSA room anyway. :-D

66. DAvid on December 6, 2008 at 12:13 pm

TFSA-Experimenter:
Your proposal sounds like a money laundering scheme to me, but here’s another question: Since your friend buys \$5000 of your company, and sees a return of \$50,000, how do you see any value in this? He sees the profits from his investment, but you have no assurance of the return of the cash to you. Any documentation you create in an attempt to assure the return of the dividends just supports the CRA case against you.

Listen to your Accountant.

DAvid

67. Finance Guy on December 10, 2008 at 7:02 pm

The best way to build TFSA contribution room is to work for a private company and put away a large amount of options. Place the options into your TFSA. If the company is successful and lists on a public exchange (thus providing you with liquidity) and your options are “in the money” then you exercise options and sell shares in increasingly larger amounts until you have no more options left to exercise. You’ve ballooned your TFSA account and coverted equity into cash without ever having to pay one penny in capital gains taxes.

68. Finance Guy on December 10, 2008 at 7:04 pm

And if you want to know how to accomplish this otherwise and you’re an accredited investor, send me a message!

69. MTerry on December 14, 2008 at 4:30 pm

I checked on the options stratagy and was informed through my broker that the funds to exercise the options need to be within the TFSA. Your gain would only be the difference between the option price and current stock price.

70. coinsaver on January 1, 2009 at 3:39 am

guys,

could you help a financially illiterate guy like me understand more about TFSA. Would it be a wise move to put the 5K into a PC Financial tax free savings account or am I making a mistake here.

I don’t understand a god damn thing about call options and put options and public exhanges, buying and selling shares…. all the financing & high rolling stuff.

I just need some simple instructions on where to put the money to maximize its growth over time.

Thanks!

71. Jordan on January 1, 2009 at 3:53 am

@coinsaver

It sounds like you aren’t investing in stocks or mutual funds in an RRSP or otherwise. You just have a normal high interest savings account to save cash to use later. Putting \$5k into a TFSA instead of a normal account saves you paying tax on the interest. If that’s the only use you have for the TFSA then go for it, it makes a great emergency fund.

For \$5k it would save you \$30-40/year in taxes, it’s not much now but each year that will grow so keep maxing it out.

If you have longer term goals and want a guaranteed return consider putting GIC’s in the TFSA maybe from outlookfinancial.com

If you want better long term returns then look into a really simple investment like opening an ING Tax-Free Mutual Fund Account.

Cheers

72. FrugalTrader on January 1, 2009 at 7:30 am

coinsaver, whether it’s wise or not to deposit into a TFSA depends on your situation. If you have any other debt, it’s most likely a better bet to pay it down before contributing to your TFSA.

73. coinsaver on January 1, 2009 at 8:41 pm

thanks guys.

i have always maxed out my rrsp but i hold it in GICs in an rrsp account. I have never touched stocks or mutual funds. Just cash, gic and gold/silver.

i have stayed out of debt as i live very modestly so i don’t have any.

I looked at outlookfinancial.com and their rates are better than PC Financial and ICICI. But I notice they are a credit union rather than a bank. Would my deposits
be protected by a credit union as well as a bank with CDIC ? They gurantee this up and down on the credit union website but how can I be sure of their gurantee? With all the collapses going on, I fear I may lose my savings if the credit union goes
belly up.

I’d like to be a little less conservative and invest in stocks with the 5K account. Could you guide me on how to go about doing this or am I getting in over my head?

74. DAvid on January 1, 2009 at 10:16 pm

coinsaver,
Read about Manitoba’s Credit Union Deposit Guarantee Corporation to gain more understanding of the guarantee. Each province seems to have similar protections — I know BC does!

Few of us participating on this blog are Financial Advisors, and most of are are self taught amateurs. IF you wish advice or guidance, I recommend you engage the services of a CFA. Reading the information on this and other blogs will give you some background to understand what exactly the advisor presents to you.

DAvid

75. Joe on January 7, 2009 at 11:13 pm

If I don’t open a TFSA account in 2009, but I open a TFSA account in 2010 – do I still get my contribution room for 2009. Assume that I file tax returns in both years, because that appears to be one of the conditions that CRA is imposing.

Thanks, Joe

76. cannon_fodder on January 8, 2009 at 12:00 am

Joe,

Income is not a prerequisite for having TFSA room. AFAIK you do not need to open a TFSA until you are ready. At that point you will have accrued contribution room for all years up to that point in time.

77. Joe on January 8, 2009 at 12:09 am

Thanks for the response and that is great news. This is especially true if you don’t attain the age of majority until 19 as in some provinces. Therefore, you can open an account when you hit 19, but still have contribution room of \$10,000. Lastly, I didn’t mean to suggest that you need income to contribute to a TFSA, but it appears that you need to file a personal tax return in order to realize the contribution room. CRA must have a way of tracking these TFSA accounts.

78. maggie on January 16, 2009 at 5:15 pm

In my TFSA account I would like to purchase a monthly income mutual fund with the \$5000. I do not want extra units purchased with the monthly income. I would like the income to be deposited into this TFSA account each month in cash so that in the future I could purchase some other investment.

QUESTION: Am I allowed to put the monthly income in as cash? Is there any chance that doing this would create a penalty of over contribution?

79. nobleea on January 16, 2009 at 5:19 pm

maggie;

No, there is no chance this would create penalty of over contribution. Once the money is in the TFSA, any gains (through capital gains or dividends, or interest) is yours to keep, tax free.

80. maggie on January 16, 2009 at 5:23 pm

nobleea-

I have been told by BMO Investorline that I cannot put the monthly income in as cash and that the only choice I have is to do the reinvestment.

Would you know if RRSP’s allow you to put monthly income in as cash? I am asking because I am assuming the TFSA has similar rules concerning investments.

81. nobleea on January 16, 2009 at 5:38 pm

that defeats the purpose of a monthly income fund. it shouldn’t matter where the income fund is located, in a TFSA, RRSP, RRIF, or even an unregistered account. if it’s an income fund, it should pay out income (cash).

i think BMOIL is either misunderstanding you, or being lazy.

82. maggie on January 16, 2009 at 6:00 pm

I just talked to someone from a BMO local branch and he told me that they have tried to allow the distribution in the form of cash but their system will only allow reinvestment. Too bad they will not allow this as it would be a much better way to earn a higher rate of interest on your investment.

83. cannon_fodder on January 18, 2009 at 3:34 pm

Maggie,
Is it possible to have the money from distributions invested into a money market mutual fund at BMO? Would that solve your problem?

84. setting it straight on January 27, 2009 at 12:12 am

Your contribution room each year is made up of the total of three amounts:
1. The TFSA dollar limit for the year (which is \$5,000 for 2009 but will be indexed to inflation each year thereafter and rounded to the nearest \$500);
2. Any withdrawals made in the previous year, and
3. Any unused contribution room from the previous year.

Therefore, you make a million dollars, withdraw it, you can re-contribute it the following year. That would be under Section 2 which states “ANY withdrawals made in the previous year. NOT any withdrawal limited to you max contribution. I think ANY sums it up. That is from CCRA website. This is the best thing that our gov has done for us in years. Abuse it while you can because you never know what “crack pot” NDPers will form gov in the future and change these rules.

I know it’s hard to believe…but this is AWESOME!

85. nobleea on January 27, 2009 at 12:37 am

if you made a million dollars, i think increasing your contribution room wouldn’t be on the top of your mind.

if you made a million dollars in a TFSA, why would you take it out? just to put it back in? what point does that serve, other than having a million dollars in a taxable account for up to a year while your new contribution room shows up. you take it out, get a million dollars in contribution room next year, and then put it back in and reduce the contribution room by a million dollars. net gain is zero.

i think people are making too big of a deal about the ‘withdraw to increase your contribution room’.

86. maggie on January 29, 2009 at 12:48 pm

I have been told by one institution that even if you don’t open your TFSA this year you still accumulate the \$5,000 room every year. So, if you were to open your account in 2011 you would have accumulated \$15,000 in contribution room.

Is this true?

87. DK on January 29, 2009 at 1:53 pm

Maggie,

Yes its true. You will see this reflected yearly in your Notice of Assessment which will indicate your TFSA contribution room, similar to how it is currently done for RRSP contribution room.

88. robaan on August 24, 2009 at 5:39 pm

I am doing stock trading through my TFSA account that I opened with Questrade.com. At one point I got into a situation where I deliberately overcontributed (extra 20K) into my TFSA account so that I could get into an interesting stock. Now (3 weeks down), I want to fix that situation by transferring the over contributed funds into a regular stock trading account (that I opened with Questrade in the last 3 weeks).
Questrade allows me to transfer the funds or the stock positions from one Questrade account to another (TFSA to non TFSA) without any problem.
Do you know if I have to follow some Govt. procedure outside of Questrade account to communicate this to Govt as well. or is it just sufficient to transfer over contributed funds or stock positions out from TFSA account into a regular account to avoid any penalties.

By the way I have confirmed with Canada revenue agency, they charge 1% monthly penalty on your overcontributed amount in TFSA account.

89. ArDee on October 15, 2009 at 1:16 pm

A similar question as robaan. I just opened questrade TFSA account and I want to move my posiitons from regular to this TFSA account.

1. Should I move stocks upto \$5000 based on their current market value or should I calculate them on the initial purcahed value.

2. Is there a tax on moving position that have already had capital gain. Some of my stocks that I want to move are already up 15% since I bought 2 months back.

please advise.

thanks- RD

90. FrugalTrader on October 15, 2009 at 1:39 pm

Ardee, any transfers of stock would be calculated at its value at the time of transfer. In this case, any profits on the stock on the date of transfer will result in capital gains tax payable.

91. Erin on February 8, 2010 at 5:16 pm

Hi,
I am looking for advise if i overcontributed in 2009. Do i need to take the money out or will it now be considered contribution for 2010. Is there a cost for overcontributing?

92. FrugalTrader on February 8, 2010 at 5:20 pm

Erin, you will face a 1%/month penalty for over contributed amounts.

93. Ken Green on April 8, 2010 at 10:23 pm

HELP:

I would like to buy a TFSA to invest in shares in a canadian-controlled private corporation.

Does this private company have to be eligible for TFSA, if so how do I know if they are?

94. DanD on May 6, 2010 at 1:30 pm

Gains…..
I buy 10k in ABC and it grows in value to say 30k. Do I basically need to sell out of my tfsa to realize the increase in contribution room?

Meaning wouldnt I be wise at years end if I have gains to realize them. Meaning sell out at the end of the yr, then buy back at the start of a new year? What do I lose less the cost of the sells (transfers?)

95. Sampson on May 6, 2010 at 2:52 pm

@ DanD,

How do you benefit? Unless you are wanting to reduce your position in ABC (a winner) and shift to other assets, what you have at the end of the year is what you have at the beginning of the next year (\$30k).

96. ArDee on May 6, 2010 at 3:31 pm

A bit similar question as DanD,

1. Say my TFSA stock investment is at its peek and I am anticipitating a sharp decline next week. Should I sell it now and rebuy when low. Can I keep on making these gains on the same stock as oppurtunity comes (say I am smart enough to predict the fluctuation) without any penalty or taxable gains ? …..

2. I feel I have been really dumb to treat my TFSA as a typical savings account (i.e. untouched until year end) and only trading mostly through non-TFSA account. If 1. is true, then I should be doing maximum of my trading thru TFSA account, rght ?
thanks – RD

97. FrugalTrader on May 6, 2010 at 3:35 pm

ArDee, that is correct, you can trade to your hearts desire and not pay any tax within a TFSA. However, you can’t claim any losses either. If you have any tax sheltered room, it is likely that you should do your investing in there.

98. DanD on May 6, 2010 at 4:49 pm

Ardee, what i gain is 25 in contribution room looked in for future years. Basically i capitalize the gain.

where as if i didnt sell – the stock could fall and no gain in cont room.
where as if i do sell – the stock say continues to gain, well then my cap gets even bigger.

seems like a no brained to me!

99. Jason Wong on June 1, 2010 at 1:56 am

If I withdraw \$5000 from my TFSA from Provider A, am I free to recontribute that amount to ANY provider next year? Or am I forced to recontribute to my empty President’s Choice tax-free Interest Plus™ savings account?

100. FrugalTrader on June 1, 2010 at 11:59 am

Jason, you can recontribute to any provider the next year.

101. Ed Rempel on June 23, 2010 at 4:58 pm

Hi All,

If anyone has received a letter recently about overcontributing to your TFSA, CRA has indicated that they will reverse the penalty if you write in.

Apparently, about 70,000 Canadians overcontributed, which is a lot. Most were working with banks, which clearly meant they were not getting any advice.

Many people did not realize that you only get new room the following year after a withdrawal. However, you can transfer a TFSA to a new financial institution without affecting your room.

However, that may take longer than just cashing in your investments and moving them and might involve a transfer out fee, but transferring your TFSA is the right way to do it.

If your overcontribution was innocent (not deliberate) and resulted from you now know the rules, when you receive a letter from them about the penalty, just write in quoting their reference number and explain what happened. Stress that it was innocent and that you did not know the rules (assuming that is the reason).

CRA has indicated that they will routinely reverse these penalties, but they will do it on a case-by-case basis.

The best idea is to send in the money for the penalty along with your appeal letter. They will refund it to you assuming they agree with your appeal. By sending in the penalty amount, you can avoid the risk of additional late fees and interest if they should disagree with you.

Ed

102. FrugalTrader on June 23, 2010 at 10:45 pm

Awesome, thanks for the heads up Ed!

103. Steve on October 4, 2010 at 1:04 pm

Is it possible to provide your spouse with inital TFSA contribution as well as any recontribution amount?

Let’s say you provide your spouse with \$5K for TFSA contribution in early 2010 (using up contribution room). Then in late 2010 the spouse withdrawals the \$5K thereby, leaving recontribution room of \$5K. Are you allowed to give them money for the recontribution room as well as the inital contribution?

104. D. on April 27, 2011 at 4:14 pm

I have my TFSA account with BMO, just pure savings account. And I have share trading account with questrade. Now I have finally “awaken” and decided that I should buy shares with my TFSA. Question: How do I do that with tfsa in BMO and trading account with questrade?

• FrugalTrader on April 27, 2011 at 4:18 pm

One thing you can do is transfer the savings to your trading account, but this will likely incur fees. A free way to do it is to withdraw from your savings at the end of the year, then contribute to your trading account in the new year.

105. D. on April 27, 2011 at 4:22 pm

Good point! I think I will take your second recommendations. Thanks for your advice.

106. D. on April 27, 2011 at 4:27 pm

I have another question:

Say I have \$15,000 with BMO TFSA savings account this year. At the end of this year, if I withdraw \$10,000 from BMO and put it in questrade tfsa, in Jan 1 2012, can I put in another \$5000 (new year’s room) with BMO TFSA savings account? Am I allowed to have 2 TFSA accounts with 2 different institutions?

107. FrugalTrader on April 27, 2011 at 4:32 pm

Yes, you can withdraw the \$10k this year, then recontribute that amount + the new years contribution (\$5k) on Jan 1, 2012 – so \$15k total. I believe that you can have multiple TFSA’s, but make sure not to go over the allowable contribution amount.

108. Dan on April 28, 2011 at 2:35 pm

You can have multiple TFSA’s but you should just transfer from BMO to Questtrade not withdraw. A straifght transfer is easily done!

109. Rob on November 7, 2011 at 2:55 pm

Quick question – people have referenced way overcontributing to take advantage of tax free gains less the 1 % monthly penalty.

If I want to put in say \$50,000 into a self directed tsfa, which others have implied they have done, can I at my discretion, or will the financial institution be able to stop me?

(then with the plan to invest in a stock at my risk that couldbe a 4-5 bagger and then just withdraw the 50,000 in a few month and pay the penalty)

110. Rob on November 7, 2011 at 3:28 pm

http://www.fin.gc.ca/n08/09-099-eng.asp

sorry – answered my own question. Any overcontribution gain loopholes have been closed :)

111. Ed Rempel on November 8, 2011 at 12:15 am

Hi Rob,

That was a potential, high risk strategy. However, CRA implemented a new 100% tax on TFSA profits of overcontributions. If you make \$100,000 profit, you will have to pay all of it to CRA.

On the upside – the financial institution won’t stop you. On the downside – 100% tax is definitely a deterrent. :)

Ed

112. Kiran Ramaswamy on January 16, 2012 at 3:00 pm

This is a kinda old thread and I’m not sure if anyone is reading, but I’m curious to know whether there is any official word on whether or not the following strategy is legal / works:

Say I were to just start my TFSA this year. I put in the currently available \$20,000 in to some stocks. Since the market is kinda low right now, let’s assume that by the end of the year a fair amount of appreciation has occurred. The stocks, which I bought at the start of the year, are now worth \$50,000.

Can I “lock in” my extra TFSA room by doing an in-kind transfer of those TFSA shares into a standard investment account on Dec. 31, 2012, then re-contribute them Jan. 1, 2013?

If I understand the logic correctly, this should mean that my contribution limit would forever be increased to \$55,000 (\$50,000 withdrawn + \$5,000 from the next year), which is \$30,000 higher than it should be. Seems like a smart move to make?

And on the same note, lets say that instead of those shares increasing to \$50,000, they tank to \$10,000. If on Dec. 31, 2012 I withdraw those shares out and into a standard investment account, then on Jan. 1, 2013, the maximum I can contribute to my TFSA is now \$15,000 (\$10,000 withdrawn + \$5,000 from the next year), which is \$10,000 lower than it should be?

If that’s the case, then it seems to me that it is very punishing to withdraw money from a TFSA if you are in a year where you are taking a loss – and conversely, it is highly profitable to do so if you are taking a gain.

• FrugalTrader on January 16, 2012 at 3:03 pm

Hi Kiran, what you describe is accurate. Whatever you withdraw from your TFSA you can redeposit the following year.

113. KK on October 7, 2012 at 5:39 pm

Hi,

Please help me figure out my TFSA Contribution Room for Jan 2013. Details of my contribution and withdrawal since 2009 are as follows:

Contributions: Withdrawals:
Aug 2009 \$5,000.00 Nov 2011 \$5,000.00
Jan 2010 \$5,000.00 Feb 2012 \$5,000.00
Jan 2011 \$5,000.00 Mar 2012 \$1,400.00
Jan 2012 \$5,000.00 Sept 2012 \$1,100.00

Thank you very much in advance!

114. FrugalTrader on October 8, 2012 at 2:05 pm

@KK, technically you can redeposit what you have withdrawn. So in your scenario, you should be able to deposit, \$12.5k along with your regular contribution. Might be best to confirm with a professional because if you over contirbute, CRA will ding you.

115. SmithyCA on October 9, 2012 at 3:55 am

@KK -.Call and confirm with CRA what your room was for 2011 and adjust for your 2012 transactions.

116. Doreen Norris on January 3, 2018 at 2:16 pm

How can I find out how much room I have in my TFSA to contribute in this year of 2018.
That is how many dollars can I contribute. D. Norris with thanks.

• FT on January 3, 2018 at 5:13 pm

D, do you know how much you have contributed to and withdrawn from your tfsa in previous years ?

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