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RRSPs RRIFs and TFSAs -> Tax-free savings accounts (TFSAs) -> Taxes payableTaxes payable re tax-free savings accounts (TFSAs)Withholding taxes on foreign dividends in a TFSAWithholding 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. | |||||||||||
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Tax on TFSA excess amountIncome Tax Act s. 207.02The 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 This means there will be a tax payable even if the excess amount is withdrawn in the same month in which it is contributed.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 TFSAIncome Tax Act s. 207.03If a non-resident individual makes a contribution to a TFSA, the tax payable is 1% of the contribution amount per month, until either
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 Note that if only part of the amount is withdrawn, tax is still payable on the entire amount until the remaining contribution is withdrawn.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 TFSAIncome Tax Act s. 207.06The Minister of National Revenue may waive or cancel all or part of the tax payable regarding excess amounts or non-resident contributions if
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Tax on investment income in the TFSAThe investment income earned on prohibited investments in the TFSA is subject to income tax 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 be tax at a rate of 33%. Under amendments included in Bill C-47, which became law in December 2010, after October 16, 2009, any income from prohibited investments will be considered an "advantage" and taxed at a rate of 100% (all the income will be payable as tax). The previous taxes on income from prohibited investments were repealed. 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
Tax Tip: Tax-free savings accounts are not always tax-free! | |||||||||||
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Revised: April 25, 2013
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