TFSA Information Updated ñ Withdrawal Rules Clarified

CRA has just released an updated version of RC4466 Tax-Free Savings Account (TFSA), Guide for Individuals.  It includes an important section on rules established on October 17, 2009 to prevent abuse of TFSAs, as well as proposed changes regarding the successor holder of the TFSA. This designation is available in provinces that recognize beneficiary designations for TFSAs. Currently, all provinces but Quebec allow this.

There was some confusion about the re-contribution rules when TFSAs were first introduced. Many taxpayers were assessed penalties for over-contributions last year because they understood that amounts withdrawn can be put back into their TFSA accounts. This is true, but not until the next calendar tax year. The TFSA Guide explains it this way:

"You cannot contribute more than your TFSA contribution room in a given year, even if you make withdrawals from the account during the year. Withdrawals from the account in the year will be added to your contribution room in the following year. If you over-contribute in the year, you will be subject to a tax equal to 1% of the highest excess TFSA amount in the month, for each month you are in an excess contribution position.î

As contribution limits grow, TFSA accounts will become increasingly important savings and investment vehicles for all eligible Canadians. Make sure that you know the rules so your clients will benefit from your expertise!

ADDITIONAL EDUCATIONAL RESOURCES:

Advanced Tax Preparation and Research, EverGreen Explanatory Notes, Knowledge Bureau's Annual Line-by-Line Tax Update Workbook