Here is the basic information regarding withdrawals from a tax-free
savings account:
Withdrawals will create additional contribution
room equal to the amount of the withdrawal (yes,
including any gains included in that withdrawal) in the next year (not in the year of the withdrawal).
The contribution room will also be increased by the normal annual
TFSA dollar limit.
Income earned in and withdrawals from a TFSA will not affect
eligibility for federal income-tested benefits and credits such as
guaranteed income supplement (GIS)
old age security (OAS)
age exemption tax credit
Any fees paid related to the TFSA will not be
tax-deductible.
In kind
withdrawals can be made, with the investments being transferred to a
non-registered account, or as a contribution to an RRSP, subject to
available RRSP contribution room. When in kind withdrawals are
made, the value of the transaction will be the current market value of
the investment. This will be the contribution amount if the
investment is transferred to an RRSP. If the investment is
transferred to a non-registered account, the current market value at
time of withdrawal will be the cost basis for the non-registered
investment. Any subsequent capital
gain or loss when the investment is sold will use this value as
the cost basis.
TFSA Withdrawal Example
Unused contribution room Dec of year 1
$ 9,000
Withdrawal Dec of year 1
80,000
TFSA dollar limit year 2
7,000
Contribution room Jan 1 year 2
$96,000
Note that if your TFSA has had gains or losses and you make a withdrawal, only the
actual amount of the withdrawal increases the contribution room in the
next year. See the Jamie Golombek article in the Financial Post
about a court case related to this: Judge
says blame the bank, not the CRA, in latest TFSA overcontribution case.
If the maximum has been contributed to a TFSA, and then a withdrawal is made, no further amount can be
contributed (without penalty) until the following
year. On January 1st of the following year, the withdrawal amount from the previous year will be
used to increase your regular annual contribution room.
Rules enacted in 2010 ensure that any withdrawals of
amounts regarding deliberate overcontributions, prohibited investments,
non-qualified investments, asset transfer transactions and income related
to those amounts do not constitute withdrawals for TFSA purposes, and do
not create additional TFSA contribution room.
Tax Tips:
Unless you
are retired or low income, you are usually better to withdraw money from a TFSA instead
of an RRSP.
Don't accidentally overcontribute to your TFSA - you'll pay penalties!