RRSPs RRIFs and TFSAs -> Tax-free savings accounts (TFSAs) -> Taxes payable
Taxes Payable re Tax-Free Savings Accounts (TFSAs)
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.
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 This means there will be a tax payable even if the excess amount is withdrawn in the same month in which it is contributed.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 calculation of the amount subject to tax is made on CRA form RC243-SCH-A Schedule A - Excess TFSA Amounts. The calculation of the tax payable is made on CRA form RC243 Tax-Free Savings Account (TFSA) Return.
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 calculation of the amount subject to tax is made on CRA form RC243-SCH-B Schedule B - Non-Resident Contributions to a Tax Free Savings Account (TFSA). Note that if only part of the amount is withdrawn, tax is still payable on the entire amount until the remaining contribution is withdrawn. The calculation of the tax payable is made on CRA form RC243 Tax-Free Savings Account (TFSA) Return.
Although there is a deemed disposal of assets when a Canadian resident becomes a non-resident by emigrating to another country, s. 128.1(10)(a) of the Income Tax Act excludes this treatment for TFSAs and certain other properties. So although a non-resident cannot make contributions, they can still own the TFSA. The TFSA is also not a "reportable property". An individual who ceases to be a resident of Canada and who owns one or more reportable properties with a total fair market value in excess of $25,000 must file a list of these properties with the Minister of National Revenue. The individual may be subject to a departure tax on capital gains related to reportable properties. See the CRA information on departure tax.
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
Income Tax Act s. 207.04, s. 207.06
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 50% tax can be recovered if
The calculation of the tax payable on non-qualified investments or prohibited investments is made on CRA form RC243 Tax-Free Savings Account (TFSA) Return.
Previously, the investment income earned on prohibited investments in the TFSA was subject to income tax at a rate 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 have been taxed at a rate of 33%, so $33 of tax would be payable for every $100 of income on the prohibited investment. This has been repealed, and replaced with a tax rate of 100%, as indicated in the next paragraph.
Under amendments included in Bill C-47, which became law in December 2010, after October 16, 2009, any income from prohibited investments is now considered an "advantage" and is taxed at a rate of 100% (all the income is payable as tax).
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.
Canada Revenue Agency Resources
Income Tax Folio S3-F10-C3, Advantages - RRSPs, RESPs, RRIFs, RDSPs and TFSAs - the comment period for this chapter ends on December 31, 2018
Tax Tip: Tax-free savings accounts are not always tax-free!
- TFSA Investments - qualified, non-qualified, and prohibited
Back to TFSA main page.
Revised: December 29, 2018
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