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RRSPs RRIFs and TFSAs -> Tax-free savings accounts (TFSAs) -> Taxes payable

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 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.

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  This means there will be a tax payable even if the excess amount is withdrawn in the same month in which it is contributed.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.

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
bullet the total amount is withdrawn, or
bullet 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  Note that if only part of the amount is withdrawn, tax is still payable on the entire amount until the remaining contribution is withdrawn.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.

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

bullet the liability arose as a consequence of a reasonable error; and
bullet the individual rectifies the situation without delay, by transferring out the excess amount or non-resident contribution.

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
bullet the TFSA acquires a prohibited or non-qualified investment, or
bullet an investment held by the TFSA becomes a prohibited or non-qualified investment.

The 50% tax can be recovered if
bullet 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
bullet 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.

Tax on investment income in the TFSA

Previously, the investment income earned on prohibited investments in the TFSA was subject to income tax at a rate equivalent to 150% of the normal federal tax (Part I tax) on that income.  For instance, for a person with a marginal federal tax rate of 22%, the income would have been taxed at a rate of 33%, so $33 of tax would be payable for every $100 of income on the prohibited investment.  This has been repealed, and replaced with a tax rate of 100%, as indicated in the next paragraph.

Under amendments included in Bill C-47, which became law in December 2010, after October 16, 2009, any income from prohibited investments is now considered an "advantage" and is taxed at a rate of 100% (all the income is payable as tax).

Prior to these amendments, any income from non-qualified investments was taxed at regular federal/provincial tax rates, but any income from that income (compound income) was not taxed.  The amendments in Bill C-47 also tax income earned on income from non-qualified investments.

Department of Finance information
bulletOctober 16, 2009 proposal re technical changes to TFSAs

Tax Tip:  Tax-free savings accounts are not always tax-free!

Previous:
bullet What is better - TFSA or RRSP?
bulletTFSA contributions
bulletDon't over contribute!
bullet Unused contribution room
bulletTFSA investments - qualified, non-qualified, and prohibited
bullet TFSA withdrawals
bulletAsset transfer (swap) transactions

Next:
bullet Marital breakdown
bullet Death of the TFSA holder

Back to TFSA main page.

 

Revised: December 22, 2013

 

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