# TFSA Question taxation?



## [email protected] (Feb 20, 2015)

Hi there Tax EXPERTS.

According to the CRA My TFSA contribution limit was $29,615 CAD for 2015, I contributed 32,000 CAD (25,441USD) since my brokeage rep advised me I was allowed 33,500.

I bought shares of Apple @ 109 USD and I am currently up 10% about $3000 book value.

I looked at the CRA website and it says that I must pay a 1% penalty for the excess amount I contributed for every month?


What I am trying to figure out is how do I remove the excess contribution from my shares of apple? so I am not charged 1% from January up until December of 2015?

Also Do I face other implications in taxes ????

Thanks for trying to clarify


----------



## 0xCC (Jan 5, 2012)

The CRA isn't known for being up to the minute on TFSA contribution limits so the first thing to ask yourself is whether you can make sense of the $29,615 limit the CRA is telling you.

Things you need to know/answer in order to figure this out:
Were you 18 or older in 2009?
Were you a Canadian resident since 2009?
Have you made any contributions to a TFSA?
Have you made any withdrawals from a TFSA before the end of 2014?

If you answer yes to the first two questions and no to the second two then your contribution limit is $5,000 for each of 2009, 2010, 2011 and 2012 for a total of $20,000 plus $5,500 for 2013, 2014 and 2015 for an additional $16,500 and a grand total of $36,500 of contribution room. This is based on the information found here: http://www.tfsa.gc.ca/ 

If you have made contributions to a TFSA already you need to subtract those contributions from the $36,500 total contribution room.
If you nave made withdrawals from a TFSA before the end of 2014 you can add those withdrawal amounts back to your available contribution room.

If you find that those calculations show that you did in fact over-contribute to your TFSA you need to withdraw the over contribution amount from your TFSA. If you don't have the cash in your account to withdraw the entire over-contribution amount you will need to sell some stock to get the cash to do it. If you don't make the withdrawal you will be assessed a 1% per month penalty as you have noted. I don't believe there are any other implications (you will not have to pay any tax on the gain in your Apple shares if you have to sell some to cover the over-contribution) but don't quote me on that.


----------



## stardancer (Apr 26, 2009)

(you will not have to pay any tax on the gain in your Apple shares if you have to sell some to cover the over-contribution) but don't quote me on that. 

True- no capital gain tax on growth within the TFSA; also no tax recognition of capital losses within the TFSA.

Hint: always keep track of your own TFSA contributions and withdrawals. Institutions don't send any TFSA info to CRA until almost a year later, so CRA is always behind the times.


----------



## Eclectic12 (Oct 20, 2010)

^^^^

+1 ... if one treats the TFSA contribution room like balancing a cheque book, one will have the current info - regardless of the potentially outdated info a broker rep or CRA may have.


Assuming the calculations verify that this is indeed an over-contribution, since the stock is up - where the sell commission isn't too much - selling a bit of stock seems the easy solution.
Will there be any currency conversion costs (i.e. is this a USD TFSA)? That might change things a bit.


Cheers


----------



## onek (Feb 20, 2015)

*TFSA Contribution Room*

. . . as described above, contribution room for any Canadian over 18-year old in 2009 is $31,500 (4x5,000+3x5,500) at the start of 2015 --- IFF they made no contributions --- otherwise the contribution room is $36,500 less the total contributions plus total withdrawals prior to 2015.

. . . for me, it's not clear whether the $36,500 is a cap . . . what if one had contributed $36,500, earned $3,500 interest, and then withdrew the combined $40,000.
Would the contribution room in 2016 be $40,000+$5,500 or would it be restricted to $36,500+$5,500?

I ask, because the institution that holds my TFSA began charging a fee in January 2015.


----------



## Eclectic12 (Oct 20, 2010)

onek said:


> . . . for me, it's not clear whether the $36,500 is a cap . . . what if one had contributed $36,500, earned $3,500 interest, and then withdrew the combined $40,000.
> Would the contribution room in 2016 be $40,000+$5,500 or would it be restricted to $36,500+$5,500?


The TFSA contribution room limit applies to ... *contributions*. The "cap" is what one has currently ... which is why keeping it current is important, IMO.

If I turn 18 in May 2015, I have $5.5K TFSA contribution room. As soon as I contribute $5.5K in July 2015 - I have $0 TFSA contribution room and a TFSA with $5.5K in it. 

Say the investment triples to $16.5K and I withdraw $15k in Oct 2015. I now have $0 TFSA contribution room, a TFSA with $1.1k in it and $15K cash in hand.

Jan 1st, 2016 - I am granted the 2016 contribution room of $5.5K and the $15K withdrawal becomes additional contribution room for a total of $20.5K.
If I make a TFSA contribution in Feb 2016 of $20.5K - I'm back to $0 TFSA contribution room and a TFSA with $20.5K plus whatever the $1.1K has grown to.

The key here is the limit will grow whenever new room is added or withdrawals become additional room or drop when contribution are made. 

What will trigger the penalty is putting in contributions that are over the current available room ... just like writing a cheque when there are no funds in the chequing account will trigger an NSF charge.




onek said:


> . . . I ask, because the institution that holds my TFSA began charging a fee in January 2015.


And what did the institution tell you the fee was for?

If it's for an over-contribution, then it's the penalty ... if it's a fee from the account itself, it may have nothing to do with the TFSA contribution limit or an over-contribution.


Cheers


----------



## 0xCC (Jan 5, 2012)

stardancer said:


> (you will not have to pay any tax on the gain in your Apple shares if you have to sell some to cover the over-contribution) but don't quote me on that.
> 
> True- no capital gain tax on growth within the TFSA; also no tax recognition of capital losses within the TFSA.


I wasn't that clear in my statement there, the part I was saying "don't quote me on" was about whether there were any other penalties besides the 1% of the over-contribution. Capital gains should always be tax-free unless you fall into some special CRA category like being "too successful" in your TFSA (a 10% gain does not qualify as "too successful", this seems to apply to people that are well into the 6-figure range inside their TFSA) or having non-qualified investments (US stocks do not fall into that category).



onek said:


> . . . as described above, contribution room for any Canadian over 18-year old in 2009 is $31,500 (4x5,000+3x5,500) at the start of 2015 --- IFF they made no contributions --- otherwise the contribution room is $36,500 less the total contributions plus total withdrawals prior to 2015.
> 
> . . . for me, it's not clear whether the $36,500 is a cap . . . what if one had contributed $36,500, earned $3,500 interest, and then withdrew the combined $40,000.
> Would the contribution room in 2016 be $40,000+$5,500 or would it be restricted to $36,500+$5,500?
> ...


As Eclectic12 points out as long as the $40,000 was withdrawn in 2015 the 2016 contribution room would be $40,000 + $5,500.


----------



## onek (Feb 20, 2015)

The fee is, for example, to transfer a TFSA balance to a different financial institution


----------



## 0xCC (Jan 5, 2012)

onek said:


> The fee is, for example, to transfer a TFSA balance to a different financial institution


So withdraw on December 29-31, 2015 and contribute on Jan 2, 2016. The only issue with this is maybe a fee for closing an account or withdrawing everything from an account.


----------



## Eclectic12 (Oct 20, 2010)

onek said:


> . . . as described above, contribution room for any Canadian over 18-year old in 2009 is $31,500 (4x5,000+3x5,500) at the start of 2015 --- IFF they made no contributions --- otherwise the contribution room is $36,500 less the total contributions plus total withdrawals prior to 2015. ...


With this style of calculating the current available TFSA contribution room - won't the starting contribution room granted be $31.5K in *both* cases?

As I read the formula - each factor is being totaled across 2009 to 2015 - with or without contributions or withdrawals so that the "starting point" contribution room granted by the gov't should be identical.


As a bit of a pet peeve ... unless it's someone who is thinking about making their first contribution to a TFSA, I question how useful this type of "total across the years" formula is compared to taking a few minutes to keep a running total. For example, in 2009 - +$5.5K contribution room, make a $3K contribution and update the running total by subtracting $3K to end up with the current available of $2.5K.

From the posts I've seen - using this "total years" style seems to be leading to a lot of confusion ... including obscuring the fact that the contribution room limit is dynamic and that whatever happens within the TFSA account *has no impact* up until a withdrawal is made.

At the end of the day - as long as one is doing it correctly - that's all that matters ... but it seems tedious and confusing compared to keeping a running total.




onek said:


> . . . I ask, because the institution that holds my TFSA began charging a fee in January 2015 ...
> The fee is, for example, to transfer a TFSA balance to a different financial institution


Then the fee is a function of the account privileges (just like having pay a commission to buy/sell a stock) and nothing to do with the gov't or penalties or the TFSA contribution limit.

As suggested by 0xCC ... as long as the withdrawal does not trigger a fee for closing the account, likely the cheaper alternative is a mid to late Dec withdrawal. It avoids the fee as well as keeps the time to wait for the withdrawal $$ to convert to added TFSA contribution room $$ short.

Where it's cash - there's no down side as a week or two of interest isn't going to add much to one's taxable income. An "In-Kind" withdrawal of stock would be different but I suspect most are transferring *everything* to a different financial institution versus wanting to transfer a few stocks. 


Cheers


----------



## Eclectic12 (Oct 20, 2010)

0xCC said:


> I wasn't that clear in my statement there, the part I was saying "don't quote me on" was about whether there were any other penalties besides the 1% of the over-contribution...


Good clarification ... though to be complete, one of the changes made in late 2009 was to grant the ability to review the over-contribution for whether it was deliberate or an honest mistake. The honest mistake version of the penalty is 1% per month while the deliberate mistake penalty, as I understand it - can be as high at 100% of any gains.

Some with money and advisors were massively over-contributing intentionally with such a small "slap on the wrist" penalty - compared to what they could gain.


Cheers


----------



## onek (Feb 20, 2015)

Thanx all

MYTFSAPLAN: Withdraw *all *at the end of December 2015. Contribute *all*, plus 2016 contribution, at the beginning of January 2016. 

THEANSWER: The amount of contribution room created by the withdrawal is not capped. (Of course, if I had lost money on the investments, I cannot top-up the contribution room either.)


----------



## Eclectic12 (Oct 20, 2010)

The amount that can be contributed to the TFSA is capped by what is available to you as contribution room.

For withdrawals, a dollar withdrawn becomes an added dollar of TFSA contribution room the following year. So yes, the limiting factor will be the value in the TFSA account as without value to withdraw, there will be no added TFSA contribution room down the road.


Of course ... withdrawing from the TFSA in Dec and re-contributing in Jan is a zero sum game, with a cost to it - without an overriding factor.
While the funds are outside the TFSA, any gains are taxable ... increasing one's taxable income.


For example - one can look at it as avoiding the transfer fee ... but if the investment in the other TFSA is paying the same, one has given up a bit of gain plus potentially increased one's taxable income to end up with the same dollars growing at the same rate in a different account. On the other hand, if the investment in the other TFSA has better growth ... then avoiding the fee plus a potentially higher income could be paid back quickly.


For some reason, people get distracted by the ability to temporarily increase their TFSA contribution room and forget that depending on why they are doing it ... it may be of no benefit and possibly a bit of harm. So make sure you are clear on what the costs/benefits will be.


Cheers


----------

