# TFSA withdrawl and tax



## redbull44 (Jun 20, 2009)

Let's met setup a scenario: I have TFSA with Questrade ( Canadian Broker)

I max out TSFA contribution by putting in 5k Jan 2009. 

June 2009, the 5k balloons due to stock hitting sky high, and turns into 15k. The 10k capital gain is not taxed correct?



If I withdraw 5k and another 5k in Aug and Sept 2009, how does tax works in terms of capital gain?


----------



## steve41 (Apr 18, 2009)

No tax. It's a Tax Free Savings Account. (so are you going to share the ballooning stock with us?  )


----------



## George (Apr 3, 2009)

Steve is correct, but I'll also add in that your contribution room will permanently increase if you withdraw the money from the TFSA, since any withdrawals are added to your contribution room for the following year.


----------



## leslie (May 25, 2009)

redbull44 said:


> If I withdraw 5k and another 5k in Aug and Sept 2009 ...


But please DON'T withdraw the profits. You only grow your wealth when you allow profits to compound. And when the profits were tax-free and will compound tax-free for the next 50 (?) years of your life, this is too good to pass up.

Of course you might have valid uses for the cash but the $5k value indicates you plan to spend it.


----------



## steve41 (Apr 18, 2009)

If you can maintain that growth rate for the next 20 years, you will be able to buy out Bill Gates.


----------



## whitegoodman (Apr 22, 2009)

Of course you could withdraw the profit at the end of Dec. and then come Jan. your contribution room will be your initial $5,000 + (what ever the new 2010 limit will be) + the amount of your withdrawl. By re-investing your withdrawl in Jan. you risk whatever change in value your security encountered while you were not invested, but you have locked in your new contribution limit.......I think ! 


wg


----------



## CJB (Apr 4, 2009)

Not sure where you're getting all those numbers from. I believe the contribution for consecutive years is simply a new $5000 (adjusted periodically for inflation) + withdrawals in previous year - over contribution for previous years


----------



## whitegoodman (Apr 22, 2009)

CJB said:


> Not sure where you're getting all those numbers from. I believe the contribution for consecutive years is simply a new $5000 (adjusted periodically for inflation) + withdrawals in previous year - over contribution for previous years


Well let's compare what we said.... 

a new $5000 (adjusted periodically for inflation) /or/(what ever the new 2010 limit will be) ..... same thing

+ withdrawals in previous year /or/ the amount of your withdrawl ..... same thing


over contribution for previous years / the previous posters had not mentioned over contributions so I left it out but yes these must be subtracted.

the only number I used was the original $5,000 contribution which is either ignored if it is left in or added to the formula if you choose to withdraw your all your funds and then re-invest in the new year.

I was actually trying to convey the fact that by withdrawing funds you can LOCK IN any gains you have made towards your contibution limit the following year..... 

using the OP example above:

by taking out his $10,000 gain he will have $5000 ( adj for inflation) + $10,000 = appr. $15,000 contribution room next year.

by leaving it in, stock could tank back to original value, leaving him with $5000 ( adj for inflation) = appr. $5,000 contribution room next year

this was merely a reason for why it may be advantagous to withdraw funds (especially large gains )

wg


----------



## CJB (Apr 4, 2009)

Yes thank you for the clarification. I was simply confused by your inclusion of the original 5000 in the subsequent contribution room.

But maybe you can explain further everyone's fascination with withdrawing then depositing gains in the TFSA.

For example, if you perform the same transaction as in your post above, then next year deposit the 10k gain, you still must come up with an addition 5k to max out your contribution room, no? I'm finding it hard to see how it is so different than simply leaving the money in, and adding 5k next year?


----------



## whitegoodman (Apr 22, 2009)

I am not very good at transfering my thoughts to paper and thus my posts are probably only making sense to me 

I think I am using the term "contribution limit poorly" ( read wrong ) !

the reason you may want to w/d any large gains is to lock them in and then add them to the next years contribtion . 

the "yearly contribution limit" will always be $5000 ( adj for inflation ) 

but when you lock in your gains by w/d funds your "allowable contribution" the following year will include those gains. 

If you let the investment ride you could loose the gains. 

So the point is you MIGHT want to w/d if you hit a multi bagger stock .... you will not be penalized by w/d the funds as you will be allowed to recontribute this amount plus the normal contribution in the following year. 

wg


----------



## whitegoodman (Apr 22, 2009)

Well that last post basically repeats what I said earlier and doesn't make any sense so I have come to the conclusion that there is NO benefit to withdrawing money from a TFSA at all .....well if you need the cash I guess there is.

wg


----------



## George (Apr 3, 2009)

The concept makes sense, but only if you hold an investment inside a TFSA that has a huge gain (it doubles in value or more).

Think of it this way: the TFSA lets you hold X dollars' worth of investments in an account that is not subject to any taxes, either while in the account or upon withdrawal. Each year, starting in 2009, the value of X increases by $5000 (and eventually larger amounts due to inflation). Thus, the total amount you can contribute to the account will be ($5000*X), where X is the number of years the account has been opened after 2009. 

Since withdrawals from the current year are automatically added to the contribution room for the next year, it's possible to "boost" the value of the account beyond the $5000*X limit by withdrawing funds from any large-gaining securities. If, in 2009, you invest $5000 in your TFSA in a stock that jumps in value ten-fold, your TFSA will have a value of $50,000. You could then withdraw the entire $50,000, which would be added to next year's contribution limit. The $50,000 is permanently "locked in" to your contribution limit, and you have secured a tax shelter for life for that amount of money.

Of course, the argument is all in theory anyway, since it's very difficult to reliably find stocks that will jump in value that much in a short timeframe. It's also possible that the government would revise the TFSA rules to limit the withdrawal amounts that can be added to a future year's contribution limit.


----------



## stephenheath (Apr 3, 2009)

George, I think there is a flaw in your logic. You say:



> The $50,000 is permanently "locked in" to your contribution limit, and you have secured a tax shelter for life for that amount of money.


But that's not what really happens because that contribution limit is only increased until you re-contribute that money. So there is no difference at all between a TFSA where you put in $5000 year one, it goes to $50,000 in value, you don't withdraw it, and year two you put the maximum $5,000 in (it's worth $55,000), vs. one where you put in $5,000 year one, you withdraw the $50,000, then the next year you put it back in along with the $5,000, and your TFSA now has $55,000. In short, as soon as you recontribute, you're no better off than if you had never withdrawn.

Now, you could withdraw the $50,000 and leave it out, but unless you're spending the money, you're going backwards because now it's gaining value in taxable ways instead of tax free.

The only benefit is if you take that $50,000 and spend it (say, paying off your mortgage because it's a higher return), then later down the road when your funds are free again, you could put that $50,000 back in... but once again, as soon as you do that, your "extra" contribution room is gone and you're no further off than the person who never withdrew it (aside from different levels of investment gains).


----------



## cardhu (May 26, 2009)

This notion of “locking in” a higher contribution limit, by withdrawing funds and then recontributing them, is an illusion ... it ain’t real ... the maneouver serves no useful purpose.


----------



## specialk (Jul 14, 2009)

So when is the value of a capital gain considered "locked-in" in a TFSA? At the end of the tax year?


----------



## stephenheath (Apr 3, 2009)

Wouldn't locking in the capital gain involve buying and selling the same security to reset the Adjusted Cost Base and lock in the gains? Since that's totally moot in a TFSA (no capital gains tax, no capital loss tax breaks) you would probably never pay the fees to do it, would you?

As far as locking in contribution room, your contribution room is always:

Current Year's Contribution Room + Unused Contribution Room From Past Years + Amounts Withdrawn And Not Redeposited.

Your TFSA is always Contributions + Returns/Gains Earned - Amounts Withdrawn And Not Redeposited.

So your maximum TFSA each year is your current TFSA + your contribution room, which is:

Contributions + Returns/Gains Earned - Amounts Withdrawn And Not Redeposited + Current Year's Contribution Room + Unused Contribution Room From Past Years + Amounts Withdrawn And Not Redeposited.

Since you have + and - Amounts Withdrawn And Not Redeposited, they cancel each other out and you are left with a maximum TFSA each year of:

Contributions + Returns/Gains Earned + Current Year's Contribution Room + Unused Contribution Room From Past Years.

Which shows that withdrawals are totally moot as far as contribution room goes... either they are in your TFSA or you've withdrawn them and can put them in the TFSA, but they can never result in a higher overall contribution limit.


----------



## DAvid (Apr 3, 2009)

Can't you sell the investment within the TFSA and purchase another without actually withdrawing it from the TFSA? F'rinstance, convert the stock to a T-bill and lock in the gain that way?

DAvid


----------



## OhGreatGuru (May 24, 2009)

I was going to say the same thing. That "locks in" your gains. There's no need to take the money out of the TFSA. And if you get another hot stock tip you don't have to wait until next year before you can buy it.

The only logical reason for taking money out of the TFSA is if you need/want to spend it on something, or invest it elsewhere.


----------



## stephenheath (Apr 3, 2009)

Ok, I need some terminology lessons 

I always thought "locking in" was when you did something like sell and rebuy an item to force a reset of the ACB and dealt with the tax issues then.

I thought "crystalizing" was doing the same thing (sell and rebuy to force a reset of the ACB) with the tax issues dealt with later... and this only occurred back when there was a personal capital gains exemption, now you can't do it any more.

And I thought selling your stock and putting it in something different to make sure you kept your gains was "profit-taking".

Anyone know a good definitive site for the actual definitions of these?


----------



## OhGreatGuru (May 24, 2009)

stephenheath said:


> Ok, I need some terminology lessons
> 
> I always thought "locking in" was when you did something like sell and rebuy an item to force a reset of the ACB and dealt with the tax issues then.
> 
> ...


Profit-taking is a better description of what we have been discussing. As you say, locking-in is a borrowed term that is probably not appropriate here. The poster who first used the term was trying to say that if you "profit-take", and then withdraw the profits from your TFSA (presumably because you want to spend it on something), you don't lose the contribution room, because the withdrawal is added to your next year's contribution room. This is an important difference from RRSPs, where you can't regain contribution room after making withdrawals.


----------



## michealjackson (Aug 21, 2009)

Thanks for sharing this useful information. It's great.
this is interesting.. thanks so much for sharing!
plan solution commission de surendettement - commission de surendettement, vous pouvez demander un dossier de surendettement.plan solution commission de surendettement


----------



## JusMe (Oct 15, 2009)

*TFSA for Income*

The moment I was able to, I created my TFSA, and transferred some very high dividend shares into it from my investment portfolio. I had to declare a capital gain on them, but they've increased very well inside the TFSA since.

I also over-contributed by the value of $1,270. I was told by my broker that the penalty for over-contribution is 1%/month.

I am, though, reducing the over-contribution by withdrawing the monthly income from the TFSA, providing me with some tax free income, and thereby reducing the monthly over-contribution penalty, as I am withdrawing that extra contribution. It will be down to $420 by the end of the year, which means that my legitimate contribution for 2010 will be $4,580.

I might find something else in my portfolio which provides a nice monthly payment, and as long as it's greater than 1% per month, I could over-contribute again, pay the penalty and increase both my TFSA capital and my monthly tax free income, while again reducing my over-contribution with monthly withdrawals.

Don't know if the tax department has seen any of this or formulated rules about it. At least yet. Maybe I shouldn't tell anyone?


----------



## OhGreatGuru (May 24, 2009)

Judging by the idea being kited by OP on this thread http://www.canadianmoneyforum.com/showthread.php?t=1162 "High level Tax Question - ..." I imagine CRA will be closing this loophole (if it is one) soon. Thereby making everyone who accidently overcontributes a small amount suffer because of the greed of the few who are trying to game the system.


----------



## lister (Apr 3, 2009)

Do and ye shall receive:

http://www.theglobeandmail.com/repo...-of-tax-free-savings-accounts/article1329844/


----------



## Robillard (Apr 11, 2009)

OhGreatGuru said:


> Judging by the idea being kited by OP on this thread http://www.canadianmoneyforum.com/showthread.php?t=1162 "High level Tax Question - ..." I imagine CRA will be closing this loophole (if it is one) soon. Thereby making everyone who accidently overcontributes a small amount suffer because of the greed of the few who are trying to game the system.


In the case described in the previous thread, it is noted in the rules for TFSAs that they are not meant to hold securities of entities with whom the holder of the account does not deal at arm's length. Such investments would be fully taxable. Overcontribution aside, that is the main problem with the structure as proposed.


----------

