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Taxes Payable re Tax-Free Savings Accounts (TFSAs)
Withholding Taxes on Foreign Dividends in a TFSA
Withholding taxes will be deducted from foreign dividends received in an FHSA or a TFSA, and these taxes are not recoverable. The Canada-United States Tax Convention (Treaty) provides for US dividends and interest to be received free of tax when earned by a trust which is generally exempt from income taxation in Canada, and which is operated exclusively to administer or provide pension, retirement, or employee benefits. S. 146.2 of the Income Tax Act states that a TFSA is deemed not to be a retirement savings plan.
The above also applies to foreign dividends in a First Home Savings Account (FHSA).
Tax on TFSA Excess Amount
Income Tax Act s. 207.02
The tax payable for excess contributions to a tax-free savings account is 1% per month, for any month in which there is an excess amount at any time in the month. This means there will be a tax payable even if the excess amount is withdrawn in the same month in which it is contributed.
The calculation of the amount subject to tax is made on CRA form RC243-SCH-A Schedule A - Excess TFSA Amounts. The calculation of the tax payable is made on CRA form RC243 Tax-Free Savings Account (TFSA) Return.
The above tax also applies to excess contributions in a First Home Savings Account (FHSA).
Tax on Non-Resident Contributions to a TFSA
Income Tax Act s. 207.03
If a non-resident individual makes a contribution to a TFSA, the tax payable is 1% of the contribution amount per month, until either
 | the total amount is withdrawn, or |
| the individual becomes resident in Canada |
The calculation of the amount subject to tax is made on CRA form RC243-SCH-B Schedule B - Non-Resident Contributions to a Tax Free Savings Account (TFSA). Note that if only part of the amount is withdrawn, tax is still payable on the entire amount until the remaining contribution is withdrawn. The calculation of the tax payable is made on CRA form RC243 Tax-Free Savings Account (TFSA) Return.
The above tax on non-resident contributions does not apply to a First Home Savings Account (FHSA).
Emigration and TFSA
Although there is a deemed disposal of assets when a Canadian resident becomes a non-resident by emigrating to another country, s. 128.1(10)(a) of the Income Tax Act excludes this treatment for TFSAs and certain other properties. So although a non-resident cannot make contributions, they can still own the TFSA. The TFSA is also not a "reportable property". An individual who ceases to be a resident of Canada and who owns one or more reportable properties with a total fair market value in excess of $25,000 must file a list of these properties with the Minister of National Revenue. The individual may be subject to a departure tax on capital gains related to reportable properties. See the CRA information on departure tax.
The above does not apply to the emigration of a holder of a First Home Savings Account (FHSA).
Waiver of Tax Payable for a TFSA
Income Tax Act s. 207.06
The Minister of National Revenue may waive or cancel all or part of the tax payable regarding excess amounts or non-resident contributions if
| the liability arose as a consequence of a reasonable error; and |
| the individual rectifies the situation without delay, by transferring out the excess amount or non-resident contribution. |
The above also applies re tax on excess contributions to a First Home Savings Account (FHSA).
Tax on Fair Market Value of TFSA Prohibited or Non-Qualified Investment
Income Tax Act s. 207.04, s. 207.06
A tax of 50% of the fair market value of the prohibited or non-qualified investment will be payable by the holder of a TFSA if
| the TFSA acquires a prohibited or non-qualified investment, or |
| an investment held by the TFSA becomes a prohibited or non-qualified investment. |
The 50% tax can be recovered if
| the property is disposed of by the TFSA before the end of the calendar year following the calendar year in which the tax arose, and |
| it is not reasonable to consider that the TFSA holder knew, or ought to have known, at the time the property was acquired, that it was, or would become, a prohibited or non-qualified investment. |
The calculation of the tax payable on non-qualified investments or prohibited investments is made on CRA form RC243 Tax-Free Savings Account (TFSA) Return.
The above tax also applies to non-qualified investments in a First Home Savings Account (FHSA).
Tax on Income from Businesses and Non-Qualified Investments in the TFSA
Frequent Trading in a TFSA Can be a Problem!
Income Tax Act s. 146.2(6)
If a TFSA carries on a business (e.g., a day-trading business) or holds non-qualified investments, tax is payable at the highest personal tax rate on the business income, and on the investment income and excess of capital gains over capital losses attributable to the non-qualified investments. This is in addition to the tax on the fair market value of the prohibited or non-qualified investments.
Note that if the TFSA is considered to be carrying on the business of day-trading, the gains from the sale of investments will not be capital gains, only 50% of which are taxed, but will be income gains, where 100% of the gain is taxed. See our article Are Your Investment Gains and Losses Capital or Income? as well as CRA links below.
The Federal 2019 Budget proposes that joint and several liability for tax owing on income from carrying on a business in a TFSA be extended to the TFSA holder, instead of just to the trustee of the TFSA (i.e., a financial institution).
In Tax Court case Ahamed v. The Queen 2019 TCC 121, the appellant had been reassessed by CRA for the 2009 to 2013 tax years to include business income or losses on the basis that it carried on one or more businesses within the TFSA. The court case did not provide any relief to the appellant. This case was appealed in 2023 in Canadian Western Trust Company as Trustee of the Fareed Ahamed TFSA v. The King, 2023 TCC 17. Although the lawyer for the appellant made a very good case about why the court should adopt a new test for "Carrying on Business" in a TFSA, he was not successful.
The above tax also applies to carrying on a business in a First Home Savings Account (FHSA). It does not apply to carrying on a business by trading qualified securities in an RRSP, because the Income Tax Act specifically allows this in an RRSP. The logic behind this would be that when the gains are withdrawn from the RRSP they will be taxed at that time. This is not so with a TFSA or FHSA.
Tax Tip: Be careful when trading in your TFSA!
Other Resources
Frequently trading stocks in your TFSA? The CRA may have questions.
The CRA gives a chilling assessment on accidental TFSA overcontributions - by Jamie Golombek, CPA, CA, CFP, CLU, TEP
Canada Revenue Agency (CRA) Resources
Income Tax Folio S3-F10-C3, Advantages - RRSPs, RESPs, RRIFs, RDSPs and TFSAs
CRA IT-479R Transactions in Securities (Archived) - see paragraphs 11 to 13 re some of the factors to be considered in ascertaining whether the taxpayer is carrying on a business.Tax Tip: Tax-free savings accounts are not always tax-free!
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TFSA Contribution Rules and Limits / Leaving Canada
TFSA Investments - qualified, non-qualified, and prohibited
Asset Transfer (Swap) Transactions
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Revised: October 26, 2023