# Partial Inheritance TFSA question



## Chrysaphius (Jun 16, 2021)

Hello,

I am getting a partial early inheritance. My question is, if the TFSA contribution limit is currently capped at 75.5k and I buy dividend paying stocks with the entire 75.5k, will I incur penalties if I don't cash out the dividend payments?

What if I drip the dividends in my TFSA and it inevitably pushes me over the 75.5k current limit? Will I incur penalties? With a drip dividend in the TFSA the account balance would spill over the 75.5k limit. 

Thanks for the help. I appreciate it.


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## Retired Peasant (Apr 22, 2013)

The limit refers to _contributions_, not _value_.


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## Dilbert (Nov 20, 2016)

The whole idea is to grow capital in a completely tax free environment. Enjoy!


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## Chrysaphius (Jun 16, 2021)

Would reinvested dividends in the TFSA count as "contributions" ?


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## potato69 (Mar 21, 2018)

Dilbert said:


> The whole idea is to grow capital in a completely tax free environment. Enjoy!


With no paperwork!!!

That's a fairly unsung benefit of the TFSA


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## Numbersman61 (Jan 26, 2015)

Chrysaphius said:


> Would reinvested dividends in the TFSA count as "contributions" ?


No. Contributions are payments you personally make to the TFSA.


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## Spudd (Oct 11, 2011)

All dividends and capital gains inside the TFSA are not relevant to the contribution limit. Your TFSA can grow as big as you like. The only thing that matters is how much money you take from outside the TFSA and put into the TFSA. Those are your contributions, which are limited by the current limit.


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## Chrysaphius (Jun 16, 2021)

Thanks guys!!!! You guys are great!!!! I do have another question regarding cash gifts I will post in a new thread.


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## Retiredguy (Jul 24, 2013)

Chrysaphius said:


> Thanks guys!!!! You guys are great!!!! I do have another question regarding cash gifts I will post in a new thread.


How old are you and how long in Canada?


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## Retiredguy (Jul 24, 2013)

TFSA Limit 2021 - TFSA Limits By Year | Wealthsimple


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## Chrysaphius (Jun 16, 2021)

Retiredguy said:


> How old are you and how long in Canada?


39 born and raised here.


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## londoncalling (Sep 17, 2011)

Spudd said:


> All dividends and capital gains inside the TFSA are not relevant to the contribution limit. Your TFSA can grow as big as you like. The only thing that matters is how much money you take from outside the TFSA and put into the TFSA. Those are your contributions, which are limited by the current limit.


Additionally, any withdrawals made would increase the contribution limit the following year.


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## Eclectic21 (Jun 25, 2021)

Not sure what's complicated ... being 18+ and a Canadian resident grants the yearly amount. This is added to unused TFSA contribution room.

Putting funds into one or more TFSA accounts reduces what's available.

What happens in the TFSA stays in the TFSA ... where CRA only cares if it fits the criteria to be business income.

Pulling funds out of one or more TFSA accounts means the following year adds the annual amount plus the withdrawal amount.

The big numbers like "$75.5K" are really only useful IMO for someone who fits the criteria plus has skipped using a TFSA. After one makes TFSA contributions - one should track their own number to be sure of what the current situation is.









TaxTips.ca - Tax-free savings account (TFSA) contribution limits


TaxTips.ca - Tax-free savings account (TFSA) contribution rules - annual and lifetime limits




www.taxtips.ca






Cheers


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## james4beach (Nov 15, 2012)

Chrysaphius said:


> Would reinvested dividends in the TFSA count as "contributions" ?


It's definitely a sweet setup, for keeping everything (including dividends, including DRIP) all inside the account. Just make the contribution -- within the limit -- and you're set. I use DRIP on everything inside my TFSA. It's the same story in your RRSP by the way. Any dividends paid, reinvested or not, are not new contributions.

A bit of an aside, but just beware (because this is frequently misunderstood) that the dividends aren't new or "free money". So yeah there will be dividends paid, but even if they are reinvested, this won't grow the account more than other stocks.

Let's say you had a choice between these inside your TFSA:
(a) hold the Canadian stock index, XIC and DRIP its dividends
(b) hold Canadian high dividend stocks and DRIP them

Over time, both are expected to end up with the *same* total value. Sometimes people mistakenly think that the dividends + DRIP in (b) results in extra money or higher returns. There are even some books out there which say this boosts returns due to "compounding" the dividends at the high yield, but it doesn't work like this in real life.

Implication: if you're just reinvesting inside the TFSA, there is no particular reason to pursue dividend stocks, and certainly no reason to pursue high dividend payers. You won't end up with any more money at the end of the day.

The dividends are harmless though, assuming that you diversify your sectors and pick good quality stocks. No problem with dividends, but they won't create extra returns.


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## Chrysaphius (Jun 16, 2021)

james4beach said:


> It's definitely a sweet setup, for keeping everything (including dividends, including DRIP) all inside the account. Just make the contribution -- within the limit -- and you're set. I use DRIP on everything inside my TFSA. It's the same story in your RRSP by the way. Any dividends paid, reinvested or not, are not new contributions.
> 
> A bit of an aside, but just beware (because this is frequently misunderstood) that the dividends aren't new or "free money". So yeah there will be dividends paid, but even if they are reinvested, this won't grow the account more than other stocks.
> 
> ...


I don't want to reinvest the dividends. I want to cash them out to supplement my working income. If I take out dividends earned in my TFSA would they be added to my working income. Let's say I make 50k gross and get 2.5k in dividends. Will I be taxed for that year on 50k gross, or 52.5k gross?


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## Chrysaphius (Jun 16, 2021)

Chrysaphius said:


> I don't want to reinvest the dividends. I want to cash them out to supplement my working income. If I take out dividends earned in my TFSA would they be added to my working income. Let's say I make 50k gross and get 2.5k in dividends. Will I be taxed for that year on 50k gross, or 52.5k gross?


Let me clarify. If I gross 50k per year from my job, and the dividends I make in a year in my TFSA account amount to 2.5 - and I withdraw them - will I be taxed on 50k or 52.5k?


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## AltaRed (Jun 8, 2009)

$50k. There is no tax on anything in the TFSA nor anything coming out of the TFSA.


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## Money172375 (Jun 29, 2018)

Chrysaphius said:


> Let me clarify. If I gross 50k per year from my job, and the dividends I make in a year in my TFSA account amount to 2.5 - and I withdraw them - will I be taxed on 50k or 52.5k?


50.

any income or growth earned in a TFSA is tax free. Tax free growth. Tax free withdrawals.

amounts withdrawn can only be re-contributed the following calendar year


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## james4beach (Nov 15, 2012)

AltaRed said:


> $50k. There is no tax on anything in the TFSA nor anything coming out of the TFSA.


@Chrysaphius yup it's a very sweet deal. That's a perfectly good use of the TFSA. Take out any cash distributions from it (could be dividends, or sell shares, whatever) and there's no impact on your taxes.

I use the same approach. I'm self employed and generally have enough cashflow from my business earnings. However if I was running low on cash, I would simply extract some $ from the TFSA, with no tax consequence.


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## Chrysaphius (Jun 16, 2021)

Wow. Thanks all. I was worried cause some of my US friends say that their parents can only gift them 15k USD per year and anything above that has tax implications. Crazy.


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## 307169 (May 24, 2015)

Be careful, there will be withholding tax from US stocks on dividend that you cannot claim from CRA if you invest them in TFSA.


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## Eclectic21 (Jun 25, 2021)

Chrysaphius said:


> Wow. Thanks all. I was worried cause some of my US friends say that their parents can only gift them 15k USD per year and anything above that has tax implications. Crazy.


That's why it's important to pay attention to what tax system(s) apply to you.

A US person (ex. US citiizen or green card holder) is going to have to file a US and a Canadian tax return for their worldwide income, no matter where they live.

A Canadian who is only in Canada files only a Canadian tax return.


Cheers


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## Chrysaphius (Jun 16, 2021)

Johnny_kar said:


> Be careful, there will be withholding tax from US stocks on dividend that you cannot claim from CRA if you invest them in TFSA.


Yeah. I don't hold any US stocks as of yet. I read that they (the US) withholds 15% of any dividends paid out to Canadians. That's lame. Who does that money go to? The IRS?


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## AltaRed (Jun 8, 2009)

Chrysaphius said:


> Yeah. I don't hold any US stocks as of yet. I read that they (the US) withholds 15% of any dividends paid out to Canadians. That's lame. Who does that money go to? The IRS?


The withholding taxes go to the IRS, but depending on what kind of accounts you hold those US stocks in, the withholding tax is a FTC (foreign tax credit) on your Canadian tax return (recovered), or is not withheld at all (RRSP/RRIF) or entirely lost in a TFSA. But overreacting to that can be penny wise and pound foolish. A US stock that pays only a 1% dividend yield results in you losing only 15% of that tiny yield. Chances are stock growth price appreciation you will enjoy will overwhelm that tax leakage.

Far too many people react negatively to things that don't really add up to much in the broad scheme of things. We see it all the time in forums like this with respect to OAS claw backs on seniors who have incomes of $100k per year. Often a disproportionate non-productive reaction to good fortune.


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## Eclectic21 (Jun 25, 2021)

Chrysaphius said:


> Yeah. I don't hold any US stocks as of yet. I read that they (the US) withholds 15% of any dividends paid out to Canadians. That's lame ...


Canada charges a US holder of a Canadian dividend paying stock a 15% (tax treaty reduced from 25% that it starts at) withholding tax on dividends.

If you as a Canadian figure your US sourced dividends should be tax free - I'd bet a US investor figures their Canadian dividends should be tax free as well. 



Chrysaphius said:


> Who does that money go to? The IRS?


The US withholding tax goes to the IRS and the Canadian withholding tax goes to CRA.

Cheers


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## Chrysaphius (Jun 16, 2021)

You guys are so smart. Thank you all.


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## Chrysaphius (Jun 16, 2021)

AltaRed said:


> The withholding taxes go to the IRS, but depending on what kind of accounts you hold those US stocks in, the withholding tax is a FTC (foreign tax credit) on your Canadian tax return (recovered), or is not withheld at all (RRSP/RRIF) or entirely lost in a TFSA. But overreacting to that can be penny wise and pound foolish. A US stock that pays only a 1% dividend yield results in you losing only 15% of that tiny yield. Chances are stock growth price appreciation you will enjoy will overwhelm that tax leakage.
> 
> Far too many people react negatively to things that don't really add up to much in the broad scheme of things. We see it all the time in forums like this with respect to OAS claw backs on seniors who have incomes of $100k per year. Often a disproportionate non-productive reaction to good fortune.


You make perfect sense. I just find there are so many more factors to consider when a Canadian wants to buy and then sell US stocks. Dividends, currency conversion rates, charges to convert CAD to US when you buy, and then when you sell. I'm still learning, though.


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