General tax info for TFSA

TFSA is a type of registered product that has similarities to RRSP and RRIFs.

Transaction RRSP RRIF TFSA
Registration with Canada Revenue Agency (CRA) Yes Yes Yes
Contribution limit Yes No Yes
Determination of contribution limit Based on Client's earned income N/A Must be a Canadian resident age 18 or older
Reporting of contribution Accumulative amount for first 60 days and last 305 days N/A Reported annually, but detailed by day for each month
Over contributions - subject to fines by CRA Yes - 1% per month on cumulative excess amount for all RRSP's owned by Client N/A Yes - 1% per month on cumulative excess amount for all TFSAs owned by Client
Transfers between policies of same owner Yes Yes Yes

Death - sole beneficiary is the spouse
  • Transfer to spouse's registered (not TFSA) policy
  • Take directly by cheque or transfer to SLF non-registered account or TFSA (if contribution room)
  • Spousal assumption RRIF
  • Transfer to spouse's registered (not TFSA) policy or
  • Take directly by cheque or transfer to SLF non-registered account or TFSA (if contribution room)
  • Spousal assumption TFSA
  • Transfer to spouse's TFSA or
  • Take directly by cheque or transfer to SLF non-registered account

Death - Spouse is not the sole beneficiary

 Pay out directly to named beneficiaries by cheque or transfer to SLF non-registered account or TFSA (if contribution room) Pay out directly to named beneficiaries by cheque or transfer to SLF non-registered account or TFSA (if contribution room) Pay out directly to named beneficiaries by cheque or transfer to SLF non-registered account or TFSA (if contribution room)
Reporting forms - Contribution Contribution receipt N/A Annual Information Return to CRA
Reporting forms - Withdrawals T4RSP/R2 tax slip T4RIF/R2 tax slips Annual Information Return to CRA
Reporting at death
  • If RRSP transferred to spouse's registered (not TFSA) account - T4RSP/R2 to spouse
  • If paid out directly - T4RSP/R2 to deceased
  • Delayed claim Interest paid to beneficiary - T4RSP/R2 to beneficiary
  • Payments received by deceased prior to death - T4RIF/R2 to deceased
  • Payments to spouse after death - T4RIF/R2 to spouse
  • Transfer to spouse's registered (not TFSA) policy - T4RIF/R2 to spouse for amount transferred
  • If monies paid in cash - T4RIF/R2 to deceased for value at Date of death
  • Delayed claim interest - T4RIF/R2 to beneficiary
  • Spousal assumption of TFSA - Annual Information Return to CRA in spouse's name for all contributions and withdrawals for the entire year (includes deceased info).
  • If paid out directly to beneficiary, T4A/R1 to beneficiary for interest after death.

The Annual Information Return (AIR) is filed electronically with CRA. CRA uses the information on the AIR to calculate the contribution room for individuals and to check for over contributions. Each individual's contribution room will be reported back to the person's Notice of Assessment when his/her tax return is filed.

The AIR is sent electronically to CRA by the end of February after the taxation year and reports:

  • If the TFSA is new or terminated.
  • Personal information of the Client, including the Client's date of birth. CRA matches the date of birth to their records for the SIN notated and if there is a discrepancy, the AIR is rejected.
  • All contributions and withdrawals detailed by day, from January 1 to December 31 of the taxation year.
  • If the owner of the TFSA has died and the spouse has assumed the TFSA, and includes the name, SIN and date of death of the deceased.
  • For a marriage breakdown, the amount transferred out or in, along with the name and SIN of the former spouse.
  • Fair Market Value at December 31 of the taxation year is reported.
     

Contributions to a TFSA

The TFSA annual room limit will be indexed to inflation and rounded to the nearest $500. Visit the Government of Canada website for more information.

Transfers between TFSAs belonging to the same plan holder, are considered to be qualifying transfers and do not affect the Client's contribution room.

Transfers from one TFSA to a TFSA of the individual's spouse when it relates to the division of property arising from the breakdown of marriage, are also considered to be a qualifying transfer.

If a Client's contributions exceed their contribution room, CRA will impose a special tax on excess contributions. The special tax is equal to 1% per month of the over-contribution amount. Excess contributions are not determined separately for each TFSA, they are cumulative for all the TFSAs the individual owns.

The AIR has to be filed with CRA by the end of February after the taxation year. The AIR reports the contributions done on a daily basis. This enables CRA to apply this special tax on excess for any month of the year. CRA will notify the Client of their new contribution room, on the Client's tax assessment.

Taxation

  • Any interest earned on a TFSA is not taxable.
  • Contributions are not tax-deductible for income tax purposes.
  • Interest on funds borrowed to contribute to a TFSA are not tax-deductible.
  • Contributions in excess of the Client's TFSA contribution limit will be subject to a penalty tax on the highest excess per month.
     

Non-residents

If a Canadian resident has an existing TFSA and then becomes a non-resident, the funds can remain in the TFSA; however the Client cannot make contributions to the TFSA while a non-resident. If a non-resident does makes a contribution, CRA will impose a special tax equal to 1% of the contribution. This tax is imposed on a monthly basis until such time as the individual makes withdrawals equal to that contribution or if earlier, the individual becomes a resident of Canada.

Non-residents cannot accrue contribution room.

If a non-resident has made excess TFSA contributions, he/she will be subject to 1% tax per month.

Withdrawals can be made while the plan holder is a non-resident. Any withdrawals made while a plan holder is a non-resident will be added back to the holder's unused TFSA contribution room in the following year, but will only be available when the holder subsequently resumes Canadian residency status.

Non-residents will not be taxed on any earnings in their TFSA or on withdrawals. However, any payments made to a non-resident beneficiary, from a deceased holder's TFSA, is required to be included in the beneficiary's income to the extent where the payment exceeds the value of the TFSA at death. Non-resident tax will be deducted on this excess.

What happens at death?

Spouse or common-law partner is the sole beneficiary

Spousal assumption

  • (Canada Revenue Agency ‘s (CRA) preferred direction): The spouse or common-law partner can assume the TFSA with all ownership rights and the TFSA will maintain its tax exempt status.
     

Transfer to surviving spouse’s TFSA

  • The spouse or common-law partner could choose to transfer the funds to his/her TFSA. This transfer must be done by the end of the year, after the year of death of the spouse. If the surviving spouse chooses this option, the surviving spouse must designate these contributions as exempt contributions by filing Form RC240 with the Canadian Revenue Agency (CRA) within 30 days of making the contribution. Upon receiving this prescribed form, CRA will disregard these contributions in the calculation of the TFSA room limit. Any amount exceeding the Fair Market Value (FMV) at the date of death may be considered to be Excess contribution to the spouse. Spousal assumption of the TFSA prevents this possible excess contribution.
     

Direct payment

  • The spouse or common-law partner will receive a cheque for the proceeds, or can request a transfer to a Sun Life non-registered account.