Taxes payable re tax-free savings accounts (TFSAs)
Withholding taxes on foreign dividends
in a TFSA
Withholding taxes will be deducted from
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 TFSA excess amount
Income Tax Act s. 207.02
The tax payable for 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. This means there
will be a tax payable even if the excess amount is withdrawn in the same
month in which it is contributed.
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%.
included in Bill C-47, which became law in December 2010, after 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 previous
taxes on income from prohibited investments were repealed.
Prior to these amendments, any income from non-qualified
investments was taxed at regular federal/provincial tax rates, but any
income from that income (compound income) was not taxed. The amendments
in Bill C-47 also tax income
earned on income from non-qualified investments.
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