Taxes payable re tax-free savings accounts (TFSAs)
Withholding taxes on foreign dividends
Withholding taxes will be deducted from
foreign dividends
received in a TFSA, and these taxes are not recoverable. The Canada-United States Tax
Convention (Treaty) provides for US
dividends and interest to be received free of tax when earned by a trust
which is generally exempt from income taxation in Canada, and which is
operated exclusively to administer or provide pension, retirement, or
employee benefits. S. 146.2 of the Income Tax Act states
that a TFSA is deemed not to be a retirement savings plan.
Tax on excess amount
Income Tax Act s. 207.02
The tax payable on excess contributions to a tax-free
savings account is 1% per month, for any month in which there is an excess
amount at any time in the month.
Tax on non-resident contributions
Income Tax Act s. 207.03
If a non-resident individual makes a contribution
to a TFSA, the tax payable is 1% of the contribution amount per month,
until either
the amount is withdrawn, or
the individual becomes resident in Canada
Waiver of tax payable
Income Tax Act s. 207.06
The Minister of National Revenue may waive or cancel
all or part of the tax payable regarding excess amounts or non-resident
contributions if
the liability arose as a consequence of a
reasonable error; and
the individual rectifies the situation without
delay, by transferring out the excess amount or non-resident
contribution.
Tax on prohibited or non-qualified investment
Income Tax Act s. 207.04, s. 207.06
Tax on fair market value
A tax of 50% of the fair market value of the prohibited
or non-qualified investment will be payable by the holder of a TFSA if
the TFSA acquires a prohibited or non-qualified
investment, or
an investment held by the TFSA becomes a prohibited
or non-qualified investment.
The 50% tax can be recovered if
the property is disposed of by the TFSA before the
end of the calendar year following the calendar year in which the tax
arose, and
it is not reasonable to consider that the TFSA
holder knew, or ought to have known, at the time the property was
acquired, that it was, or would become, a prohibited or non-qualified
investment.
Tax on investment income in the TFSA
The investment income earned on prohibited
investments in the TFSA is subject to income tax equivalent to 150% of
the normal federal tax (Part I tax) on that income. For
instance, for a person with a marginal federal tax rate of 22%, the
income would be tax at a rate of 33%.
Under amendments proposed on October 16,
2009, any income from prohibited investments will be considered an
"advantage" and taxed at a rate of 100% (all the income will
be payable as tax). The existing
taxes on income from prohibited investments will be repealed.
Currently, any income from non-qualified
investments is taxed at regular federal/provincial tax rates, but any
income from that income (compound income) is not taxed. The
October 16, 2009 proposed amendments will also tax income
earned from income from non-qualified investments.
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