The Tax Free Savings Account (TFSA) is a savings account that allows any individual over the age of 18 and who has a valid Canadian SIN to invest in assets and earn tax-free investment income.

Contribution limit, accumulation, and penalties

There is a limit to the amount you can contribute to the account. In previous years from 2009 to 2012, the contribution limit was $5,000 per year. In 2013 and 2014, the limit has increased to $5,500 per year. Then in 2015, the limit increased again to $10,000. However, starting Jan 1, 2016, the limit was decreased to $5,500.

Investment income earned and changes in the value of TFSA investments will not affect your TFSA contribution room for the current or future years.

You can have more than one TFSA at any given time, but the total amount you contribute to all your TFSAs cannot be more than your available TFSA contribution room for that year. Any amounts that exceed the contribution room will be subject to a monthly penalty tax of 1% of the excess amount, until the excess is withdrawn.

On the other hand, if your contribution for the year did not meet the limit, the unused portion is carried forward to future years. This increases your contribution limit for next year.

Withdrawals

Withdrawals from your TFSA are tax-free, regardless of the amount. These can generally be done any time you want, depending on your investments. Withdrawals will be added to your TFSA contribution room at the beginning of the following year. For example, if you withdraw $2,000 from you TFSA in 2015, your 2016 contribution room will be $7,500 ($5,500+$2,000).

Re-contributing your withdrawals is also allowed – however this will not change your contribution room for the year. For example, in 2016 taxpayer opened his/her TFSA and contributed maximum amount allowed of $46,500. Later in 2016, the taxpayer withdrew $8,000. The date that a taxpayer can re-contribute the $8,000 without incurring penalties is Jan 1, 2017. Therefore any re-contribution should be done carefully to avoid penalties from over-contributing.

Transfers

Funds given to your spouse or common law partner to contribute to their own TFSA is permitted, without any restrictions or tax consequences.

Fund transfers between your own accounts or to ex-spouse/ex-common law partner are considered qualifying transfers. These can be done without any tax consequences, as long as they are directly transferred by your financial institution.

Death of a TFSA holder

A TFSA holder may:

• Name a successor holder for the account-the survivor automatically becomes the holder of the account at the time of the former holder’s death.
• Designate a beneficiary for the account – the account will cease to exist and the funds will be distributed to the beneficiary.

 Tax implications

Successor holder

The TFSA holder may only appointed his/ her survivor (i.e., the holder’s spouse or common-law partner at the time of death) as the successor holder for the account. Any income earned after the death of the holder will continue to accrue on a tax-free basis in the TFSA and the deceased’s spouse of common-law partner may make withdrawals from the TFSA free from tax.

Where the success holder has their own TFSA, they may choose to consolidate the two plans by the direct transfer of all or part of the assets of the holder’s plan to their own plan. In general, the direct transfer will not affect the successor holder’s TFSA contribution room.

Going forward, the successor holder may make additional contributions to the combined TFSA based only on their own unused contributing room.

Beneficiary

In general, the fair market value at the date of death may be viewed as a non-taxable capital receipt to the designed beneficiary and maybe withdrawn free of tax. Any accretion in value after death will be subject to tax in the hands of the designated beneficiary.

If the TFSA holder’s spouse or common-law partner was designated as beneficiary, the situation is more complicated. When the estate is settled, the full value of the TFSA will be paid to his/her spouse. Deceased’s spouse or common-law partner has option to contribute all or portion of the funds received from the former holder’s TFSA to their own TFSA as an exempt contribution without affecting their own unused contribution room.

In order to do this, the exempt contribution payment must be made before the end of the calendar year following the year of death, the payment may not excessed the fair value of the holder’s TFSA at the date of death and the prescribed designation election from must be filed within 30 days after the contribution is made. In addition to the above requirements, any income or growth earned by the TFSA after the former TFSA holder dies is fully taxable to his/her spouse.

TFSA is a great tool to take advantage of, to save for the future. In order to make sure that the TFSA passes to your spouse of common-law partner as simply and as tax-effectively as possible, the successor holder method will allow for it in a less complicated manner.