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Are you confused by Tax Free Savings Account contributions? Don't risk hefty CRA fines.
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If you don’t understand how the calculation towards your TFSA account(s) works, you risk over contributing and facing hefty fines from CRA and never mind having to contact your accountant to have the whole mess fixed. Let's take a few minutes to walk you through how it works. I’ve been getting a number of calls recently from clients wanting to understand how to determine their Tax Free Savings Account contribution room.
Scenario one: If you’ve never contributed before the calculation is simple. Since the TFSA dollar limit for 2019 and 2020 were both $6,000 with a cumulative total of $69,500 for 2020, for 2021 you will add an additional $6,000 in room.
Scenario Two: What if you have more than one TFSA account? Just like an RSP, the room is the room is the room. Whether you have 20 TFSA accounts or just one, as of 2021 the most you can contribute is $75,500.
Scenario Three:
What if you withdrew money from your TFSA? How does that affect your contribution room.
Your contribution room is summed up by this simple equation:
Total original contribution room – Deposits + Withdrawals = Total Actual Room
Let's take a simple example, assume it’s the year 2020 and you fully contribute $69,500 cash in March leaving you with 0 contribution room left over. Assume you invest your money immediately in the stock market, and you do extremely well as the market rebounds from its low during the pandemic. Its now November 2020, your TFSA is worth $80,000. You see a house you want to buy so you sell out the portfolio and withdraw your $80,000 intending to use it as a down payment……except in December the deal falls through. You decide to postpone your house purchase and want to put the $80,000 back into your TFSA? Can you? Wasn’t your original room only $69,500? The answer is yes, and yes. You can put your $80,000 back in but you will have to wait until 2021 the following year!
Total original contribution room – Deposits + Withdrawals = Total contribution room
$69,500 - $69,500 + $80,000 = $80,000
In 2021 you put your $80,000 plus you can add an additional $6,000 because with each additional year that comes as long as you are alive and have a valid SIN you can contribute and accumulate TFSA room. But what if your investment was bad. Let's say you contributed in January 2020 invested in the stock market and then panicked and sold out your account near the bottom in March 2020, your TFSA is now worth only $60,000. November comes along you withdraw your $60,000 from the house, the house purchase falls through and you want to recontribute, you must wait until January 2021. You can only contribute $60,000 plus the new years contribution room of $6,000. Your contribution room is summed up by this simple equation
Total original contribution room – Deposits + Withdrawals = Total contribution room
$69,500 - $69,500 + $60,000 = $66,000
You can imagine how if you have more than 1 TFSA account things can get confusing pretty quick. Find some way to track your deposits and withdrawals. I use a spreadsheet.
To make things more confusing MyCRA can be out of date by up to six months. If you check the website and the numbers are wrong… you’re responsible not CRA and you’ll have to pay the fine for an over contribution. The amount is 1% per month on the over contributed amount. This might not seem like much but if more than a few months go by you’ll end up owing money and you NEVER want to owe CRA money.
I hope this has been helpful for you, thank you for listening
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About Anna Hilberry:
Anna graduated with a Bachelor of Commerce Degree in 2007. Anna became a licensed Sales Associate in 2008. In 2012 Anna became a licensed Investment Advisor. Anna has extensive experience in successful investment management with a wide breadth of product knowledge. She is currently an Associate Investment Advisor with The Hilberry Group and National Bank Financial.
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NOTE: National Bank Financial - Wealth Management (NBFWM) is a division of National Bank Financial Inc. (NBF), as well as a trademark owned by National Bank of Canada (NBC) that is used under license by NBF. NBF is a member of the Investment Industry Regulatory Organization of Canada (IIROC) and the Canadian Investor Protection Fund (CIPF), and is a wholly-owned subsidiary of NBC, a public company listed on the Toronto Stock Exchange (TSX: NA). The information contained herein has been prepared by Anna Hilberry, Associate Investment Advisor at NBF. The opinions expressed do not necessarily reflect those of NBF.
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