TFSA Hiccup

I have been a huge supporter of the Tax Free Savings Account since it was announced in the 2008 budget.

And, as painful as it is for me to write, the TFSA is something (the only thing) the Conservatives have gotten right.

But now, because of investor error, investment advisor oversight and government fine print belaying the some of the marketing behind this vehicle, about 70 000 Canadians may be on the hook to the CRA for over-contributions.

Ooops.

A maximum of $5000 can be contributed to ones TFSA in a calendar year- with the operative phrase being calendar year. Withdrawals are not subject to the claws of the taxman and the entire amount of the withdrawal becomes available room (super bonus fries) but the issue at hand is the result of a technicality. One cannot take advantage of the ability to “re-contribute” the funds withdrawn from the TFSA in excess of the $5000 limit until January 1st of the following year.

Let’s say you, unlike the majority of Canadians eligible to contribute to a TFSA, actually made a contribution of $4000 January 1, 2010 to add to the maximum amount you contributed the previous year so you have $9000 sitting in your TFSA. Let’s say a friend was in a financial jam back in February and you lent them $3000, taking it out of the TFSA. It was only a temporary situation and they pay you back June 1st. If you then deposit the $3000 back into your TFSA, you have now exceeded the maximum contribution for this year by $2000.

$4000 + $3000 – $5000 = $2000

The same holds if you are thinking about withdrawing money from one TFSA account and transferring to a TFSA with another financial institution. I will have to look into this one to be absolutely certain about what can or cannot be done. With an RRSP, it can be transferred from one institution to another without being redeemed and thus triggering a lot of taxes. I wonder if the TFSA can also be transferred from one place to another if one is careful not to “withdraw” the funds….

This was not something I made a special note of until I encouraged a friend to open up a TFSA. She went to the bank and talked about how she intended to move money in and out of it- basically use it like a bank account but the advisor told her she couldn’t, citing the restrictions above. This was a big disappointment for her but something I clarified with my own advisor before jumping into the TFSA fray.

There is no question that Canadians are not saving and investing enough for their retirement. Just this past week the Finance Minister was talking about changes to the Canada Pension Plan, essentially deducting more money from our paycheques because we are too infantile to save money on our own. Let’s see how that goes over.

Unfortunately, the recent snafu may scare people away from the very thing that could kick their retirement plan into high gear- and that would be a shame.

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~ by angryegg on June 15, 2010.

One Response to “TFSA Hiccup”

  1. Canadians interested in knowing more about Tax-Free Savings Accounts may be interested in the Consumers Council of Canada’s comprehensive research report on the subject.
    http://www.consumerscouncil.com/index.cfm?pagepath=Council_News&id=13930&modeX=Cat&modeXval=FDF15716-A488-1836-86373580B8F80203

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