A Tax-Free Savings Account (TFSA) is a type of investment account created in 2009 that lets individuals who are 18 years or older with valid social insurance numbers invest their money tax-free. Not only are TFSA contributions untaxed, but investment income and capital gains are excluded from your income taxes even when being withdrawn. Unfortunately, any fees associated with a TFSA and interest paid on borrowed TFSA funds are not tax-deductible. Essentially, for tax purposes, financial transactions related to a TFSA have no impact on your taxes.
Each year, you are allowed to contribute up to a fixed amount to your TFSA. If you don’t end up contributing the maximum amount for that year, don’t worry because your TFSA contribution room is cumulative. That means that you can deposit and withdraw as much as you like and your total contribution room will stay the same. You can either check the CRA’s website or calculate your TFSA contribution room manually.
Using the CRA’s Website: Login using the CRA’s login portal. Scroll down to the “RRSP and TFSA” section and click “Go to RRSP and TFSA details”. Your contribution room for the current year will be displayed and you can view additional information using the “View TFSA details” link. The contribution room listed here does not account for any transactions made this year. To find your updated remaining contribution room, you can call the CRA directly or perform a manual calculation.
Calculating your TFSA contribution room by hand is a simple and easy process. The most difficult part is gathering your past contributions and past withdrawals.
Step 1: Find your total unadjusted contribution room by using the contribution limits table to add up the annual limits for each year you were at least 18 years old.
Step 2: Subtract any contributions you have ever made to your account. Even if you later withdrew the money, adding them all here will make the calculation more straightforward.
Step 3: Add any TFSA withdrawals you have made before 2021. While we are adding what was subtracted in Step 2, adding your total contributions and subtracting your total withdrawals afterwards ensures that you don’t accidentally miss anything.
Step 4: ONLY for calculating your 2022 TFSA contribution room, add any withdrawals in 2021. You cannot recontribute this amount in 2021. For more information, read about TFSA Withdrawal Rules.
These are the unadjusted contribution limits that are applied each year. Both next year’s annual contribution limit and your total contribution limit can change with investment returns. If you earn any investment income or capital gains using the money in your TFSA, these increase your total contribution limit and do not affect your TFSA contribution room. Likewise, any losses are deducted from your total contribution limit and do not affect your TFSA contribution room.
For example, assume your unadjusted total contribution limit is $6,000 and you contribute $2,000, which means your total contribution room is $4,000 ($6,000 - $2,000). Let’s say you earn $500 through clever investments. Your new total contribution limit will be $6,500. but since you now have $2,500 in your TFSA account, your total contribution room will still be $4,000 ($6,500 - $2,500). If you decide to withdraw the $500 this year, then your contribution room will increase by the Annual Contribution Limit + $500 next year.
|Year You Turned 18||Annual Contribution Limit||Cumulative Contribution Limit 2021|
|2009 or Earlier||$5,000||$75,500|
As long as you maintain a positive balance, you can withdraw any amount from your TFSA without penalties or taxes. However, the withdrawn amount is still considered “contributed” and can only be re-contributed next year. Any additional contributions can only be done using your total contribution room before the withdrawal. It is important that you do not consider withdrawals made this year in this year’s total contribution limit or you may end up over-contributing. If you earn any investment income or capital gains, you can withdraw this amount without affecting your total contribution room.
For example, assume your total contribution limit is $6,000 and your TFSA account has $2,000 in it. Y your total contribution room for this year would be $4,000 ($6,000 - $2,000). Let’s say you withdraw $1,000. Your total contribution room for this year stays at $4,000. If you decide to re-contribute this $1,000 this year, your remaining contribution room will be $3,000 ($6,000 - $2,000 - $1,000).
Using the same example with a total contribution room of $4,000, suppose you earn $500 through investing and not contributing to your TFSA. If you do not withdraw this $500, your contribution room remains at $4,000. If you decide to withdraw this $500, your contribution room remains at $4,000, but you can contribute an additional $500 next year.
If you end up contributing more than your total contribution room , the Canada Revenue Agency (CRA) will charge you a monthly fee of 1% on the highest excess TFSA amount for that month. A 1% fee may sound small, but this is equivalent to 12% each year, which is massive! For example, a $10,000 over-contribution would cost you $1,200 per year.
Unused TFSA contribution room from previous years
Withdrawals made in the preceding calendar year
Withdrawals made in the current calendar year
Since the TFSA uses the highest excess TFSA amount, you will have to pay the full 1% fee even if you are over-contributed for just 1 day.
Avoiding the Over-Contribution Penalty: Keep track of any contributions and withdrawals you make and keep a record to ensure you do not over-contribute. The CRA’s website does not include contributions made this year in their calculation of your total contribution room. If at any point, you are unsure about how much room you have, call the CRA directly to receive your exact contribution room.
What to do with an Over-Contribution Penalty: If you over-contribute to your TFSA, the CRA will eventually send you an “Excess Amount Letter”, but this can happen several months after you over-contribute, so it is important to regularly check this yourself. If you receive this letter, follow these steps:
Step 1: Immediately withdraw the excess amount to avoid any additional over-contribution fees. This helps show that it was an accident and the fee will not be applied next month.
Step 2: Pay the full penalty and submit a TFSA Over Contribution form. You will only have a limited amount of time to pay the penalty before incurring extra fees.
Step 3: Once you have handled these urgent issues, send the CRA a letter describing why it was an accident and ask them to refund this fee. The CRA will refund this amount if you can reasonably prove that you didn’t know and that the CRA did not inform you.