Your TFSA – Mid-Year Checkup

Tax-free savings accounts (TFSAs) have been part of the Canadian tax system for nearly a decade, and millions of Canadians utilize them as a savings vehicle, whether for short-term or long-term purposes.

Of all tax-deferral or tax-savings plans available to Canadians, TFSAs undoubtedly provide the greatest flexibility, as the TFSA rules allow taxpayers to carryover allowable contribution room to future years and to re-contribute amounts withdrawn. However, that very flexibility, especially the ability to re-contribute previous withdrawals, also has the potential to cause taxpayers to run afoul of the rules by getting into an inadvertent overcontribution position, resulting in the imposition of penalty taxes.

A brief recap of the TFSA rules: every Canadian aged 18 years of age and older can contribute a specified annual amount to a TFSA ($5,500 for 2017). Funds contributed to the TFSA are not deductible from income, but investment income earned by those funds is not taxed, either as it accrues or on withdrawal. Where a taxpayer does not contribute to a TFSA within a particular year, the contribution not made can be carried forward and made in any subsequent year. TFSA holders can withdraw funds from their plan at any time, free of tax, and funds withdrawn can be re-contributed, but not until the following year.

Calculating one’s current year contribution room can be complex. The Canada Revenue Agency does not provide taxpayers of their current year TFSA contribution limit on the annual Notice of Assessment; taxpayers can access that information through the CRA’s automated telephone service, online portal or have their service provider do the calculation for them.

Once the taxpayer knows their contribution limit for 2017, it’s necessary to calculate how much has already been contributed in 2017. The difference between those two figures represents the balance which can be contributed before the end of the year without getting into an overcontribution position and incurring penalties. It is important to remember that if withdrawals have been or will be made during 2017, those amounts cannot be re-contributed until after the end of this year.

If it’s necessary to adjust regular contributions in order not to go “offside” by the end of the year, the best time to do it is obviously before getting into that overcontribution position. As soon as a taxpayer is in an overcontribution position, the 1% penalty tax is imposed for that month, even if the excess funds are withdrawn before the end of the month –  in other words, as explained in the Canada Revenue Agency guide to TFSAs “[I]f, at any time in a month, you have an excess TFSA amount, you are liable to a tax of 1% on your highest excess TFSA amount in that month.”

Especially where TFSA contributions are set up to occur regularly, by automatic deposit or bank transfer, it’s easy to assume that everything has been taken care of and nothing further needs to be done with respect to such arrangements. However, an “out of sight and out of mind” approach rarely makes for good financial and tax planning, and checking on the status of one’s TFSA on a periodic, at least quarterly,  basis can help to ensure that everything is as it should be, and that unnecessary penalties are avoided.