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Top Tax-Free Savings Account (TFSA) tips

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TFSA 101:

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1. TFSA investment options

TFSAs can contain different types of investments, similar to those in a Registered Retirement Savings Plan, such as Guaranteed Investment Certificates (GICs), bonds, mutual funds and stocks. See How to open a TFSA for more information or contact your financial institution.

2. Contributing to your TFSA

The maximum TFSA contribution room for an individual was $5,000 for 2009. For 2010 and 2011, your available TFSA contribution room is made up of three components:

your annual TFSA dollar limit of $5,000,
your unused TFSA contribution room from the previous year, and
the total amount of withdrawals from your TFSA made in the previous year.

It is important to note that while you can open more than one TFSA, your total contributions in a year cannot exceed your available TFSA contribution room. See TFSA contribution room for more information.

3. Withdrawing from your TFSA

Income such as interest, capital gains and dividends accumulates tax-free in your TFSA and withdrawals made from your TFSA are not taxed. Except for certain transfers, any withdrawals from your TFSA, including the income earned, will be used in the calculation of your TFSA contribution room for the following year. See Making withdrawals.

4. Transferring between TFSAs

If you have more than one TFSA, you can transfer funds directly from one of your TFSAs to another of your TFSAs without affecting your contribution room. The direct transfer must be completed by your financial institutions. If you withdraw funds on your own from one TFSA and contribute those same funds to another TFSA, the re-contribution will be considered to be a new contribution. As a result, your TFSA contribution room will be affected and you may be subject to a tax on excess contributions. See Qualifying transfers for more information.

5. Tax payable on TFSAs

If, at any time, your contributions in a year exceed your TFSA contribution room for the year, you will be subject to the TFSA tax on excess contributions. You are liable to a 1% tax per month on your highest excess TFSA amount in each month. This tax will accumulate until the excess amount is withdrawn. If you have excess contributions you should withdraw the funds immediately to avoid any additional tax. See Tax payable on excess TFSA amount for more information.

6. TFSA returns for excess contributions

If you are in a situation of excess contributions with respect to your TFSA (excess TFSA amount), the CRA will mail a TFSA Return (a pre-populated and pre-calculated TFSA Return), which will inform you of the amount of tax owing on the excess TFSA amount. See TFSA returns and payment of taxes for more information.