Investment TSFA Question...

[exstasie]

Hey,

I just had a quick question and thought someone could help me out here as I talked to my online brokerage and they weren't helpful.


In the New Year, we will be able to open up a TSFA with online traders.

I was in discussion with them and they stated that I could easily transfer everything from my current account, to a TSFA.

However, how does that work on my current investments.

For example, say that I started with $2,000 in my regular account. I invested $1,000 in equities and still have $1,000 in cash.

On the date I transfer my funds, my equities are still worth $1,000.00

Now the cash will be transferred over to the TSFA account, however, would the $1,000 in funds be exempt from Capital Gains tax when it is sold (assuming its for a gain). I'm just trying to get my head around how the taxation would work if I sell the equity.

Thanks.

[thefleet]

Most likely will be viewed as a disposition and will trigger capital gains.

[Wonderdollar]

TFSA Account

The information given below came to me from a practicing Chartered Accountant Firm through an unsolicited (?) email but as the information is very useful for each and every one of us, I am taking the liberty of posting (cut and paste) here without mentioning the name of the firm as I do not wish to advertise the name of the firm here. I would have surely given the link if it was on web some where.


In a tax-free savings account:

a)all investment income (interest, dividends and capital gains) will accumulate tax-free

b)contributions are not tax-deductible

c)withdrawals are not taxable

d)capital losses are not tax-deductible

e)dividends will not be eligible for the dividend tax credit

TFSA contributions

1.Contributions to a TFSA can be made by Canadian residents aged 18 or over

2.Up to $5,000 per year can be contributed to a TFSA, with unused contribution room being carried forward.

3.The $5,000 annual contribution limit will be indexed to inflation in $500 increments. At the current rate of inflation, the limit will increase to $5,500 in 2012.

4.If a person has contribution room, but no funds to contribute, they may contribute funds given to them by their spouse or common-law partner, with no attribution of income to the spouse.

5.Contributions can consist of \"in kind\" contributions of qualified investments.
a)Any resulting capital gain will be taxable
b)Any resulting capital loss cannot be claimed.


Qualified investments

Qualified investments will generally include all arm's-length RRSP qualified investments

Borrowing

1.Interest on money borrowed to invest in a TFSA is not tax deductible.

2.A TFSA can be used as security for a loan.

3.Cannot be used to provide margin for linked margin accounts.

TFSA Withdrawals

1.Withdrawals will create contribution room for deposits in future years (not in the year of the withdrawal).

2.Income and withdrawals from a TFSA will not affect eligibility for federal income-tested benefits and credits such as
a)guaranteed income supplement (GIS)
b)old age security (OAS)
c)age exemption tax credit

3.Any fees paid related to the TFSA will not be tax-deductible, and will not be included in contributions or distributions (withdrawals).

If the maximum $5,000 has been contributed to a TFSA in a year, and then a withdrawal is made, no further amount can be contributed (without penalty) until the following year. At that time, the withdrawal from the previous year will be used to increase the contribution room.

Unused contribution room

The unused TFSA contribution room at the end of a calendar year is the positive or negative amount determined by the formula

A + B + C - D where

A is the unused contribution room at the end of the previous calendar year

B is the total of distributions (withdrawals) made in the preceding calendar year

C is the TFSA dollar limit for the calendar year ($5,000 for 2009), if at any time in the calendar year the individual is 18 years of age or older and resident in Canada

D is the total of contributions made to a TFSA by the individual in the calendar year

Certain distributions and contributions are excluded from the above formula:

1.transfers made directly between TFSAs held by the same person

2.transfers made as a result of a marital breakdown, under certain conditions

3.withdrawals which are made to reduce or eliminate an excess contribution

4.exempt contributions made by a surviving spouse/common-law partner of a deceased TFSA holder, in relation to a payment made to the survivor from the TFSA of the deceased.

Taxes payable re TFSA

Withholding taxes on foreign dividends

In a non-registered account, withholding taxes are deducted when dividends are received from corporations resident in a foreign country. The withholding tax rate is 15% for dividends from the US. When US dividends are received in an RRSP, there is no withholding tax. This is because of the Canada-United States Tax Convention (Treaty), Article XXI.2.

We have not been able to get an answer on whether withholding taxes will be deducted on US or other foreign dividends received in a TFSA. The Canada-US Tax 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. It is quite likely that withholding tax will be deducted from US and other foreign dividends received in a TFSA. When we get a definite answer on this, we will update this information.

Tax on excess amount

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.

Non-resident contributions

If a non-resident individual makes a contribution to a TFSA, the tax payable is 1% of the contribution amount per month, until either

1.the amount is withdrawn, or
2.the individual becomes resident in Canada

Tax on prohibited or non-qualified investment

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

1.the TFSA acquires a prohibited or non-qualified investment, or
2.an investment held by the TFSA becomes a prohibited or non-qualified investment.

The 50% tax can be recovered if

1.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
2.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.

Marital breakdown

TFSA transfers can be made directly to a former spouse or common-law partner's TFSA without affecting their contribution room, if

1.the individuals are living separate and apart at the time of the transfer, and

2.the transfer is made under a decree, order or judgment of a competent tribunal, or under a written separation agreement

Death of the TFSA holder

A TFSA holder can name a spouse or common-law partner as the successor holder when the TFSA is created. On the death of the holder, the spouse becomes the new holder, keeping the tax exempt status of the TFSA. This will not affect the TFSA contribution room of the spouse.

Where no successor holder is named for the TFSA, the proceeds of the account will become part of the estate of the deceased. If a surviving spouse/common-law partner receives proceeds from the TFSA, the proceeds can be used to make an exempt contribution to the survivor's TFSA, and not affect the contribution room of the survivor, as long as

1.it is done before the end of the first calendar year following the holder's death (rollover period), and

2.it is designated as an exempt contribution in the survivor's income tax return for the year the contribution is made.

Where there is no spouse or common-law partner named as the successor holder, the TFSA will not lose its tax-exempt status until the earlier of

1.the time it ceases to exist (completely paid out to beneficiaries), or

2.end of first calendar year following the holder's death.

Any payments to beneficiaries, including during this exempt period, will be taxable to the beneficiaries, to the extent that the payment includes income or capital gains earned after the death of the holder.

Example: Holder dies with TFSA valued at $80,000. By the time the assets are distributed to the beneficiaries, the value has grown to $82,000. $2,000 will be taxable income to the beneficiaries.

Assets with named beneficiaries such as life insurance policies or RRSPs are excluded in determining the value of an estate for purposes of probate. It is likely that a TFSA with a named successor holder would also be excluded from probate. This is a very good reason for anyone with a spouse/common-law partner to ensure that they name that person as a successor holder when setting up the TFSA.

What is better - TFSA or RRSP?

The RRSP and TFSA have almost equivalent results when the marginal rate for RRSP contributions is the same as for RRSP withdrawals.

The RRSP is better if

the marginal tax rate for RRSP withdrawals will be lower than the marginal tax rate when contributions are made

The TFSA is better if

the marginal rate for RRSP withdrawals will be higher than the marginal rate for contributions

The TFSA will be useful in some situations such as:

a)when there is no RRSP contribution room available

b)keeping savings available for emergencies

c)for short term savings goals such as a vehicle, appliances, etc.
seniors who are not eligible, because of age, to contribute to an RRSP

[chococrazy]

Good post Wonderdollar, I'm going to link to it in my signature!

[Ryan5459]

Thanks for this.

I have been trying to find information on the witholding tax. It sounds like you want to invest your US assets in an RRSP and your other foriegn holdings in the TFSA.

[sorny]

Can someone explain what this means, I don't understand this part, why is capital gain taxable on contributions? What does that even mean since tfsa are not taxed?

5.Contributions can consist of \"in kind\" contributions of qualified investments.
a)Any resulting capital gain will be taxable
b)Any resulting capital loss cannot be claimed.

[CSR]

Great post WonderDollar!
That's the most comprehensive FAQ I've read.

[turtle9er]

Thanks for those FAQ, but I still have one question. I have a RBC direct investment TFSA and say I put 5000 in that account. Now I go to buy some stocks and pay it from that account, there is the fee for buying the stocks... does this count as being a contribution to the TFSA, or is it only the stocks that I buy? So what i'm saying, should I put a bit more than 5000 in the account, and buy 5000 worth of stocks? Thanks.

[SpillOnAisle9]

Thanks for those FAQ, but I still have one question. I have a RBC direct investment TFSA and say I put 5000 in that account. Now I go to buy some stocks and pay it from that account, there is the fee for buying the stocks... does this count as being a contribution to the TFSA, or is it only the stocks that I buy? So what i'm saying, should I put a bit more than 5000 in the account, and buy 5000 worth of stocks? Thanks.

No...you have to stay within the 5K limit or you wil lbe penalized. So if you're
like me with a Wood Gundy account you would need to buy $4875 worth of
stock (assuming one transaction only)

[AllWheelDrift]

Thanks for those FAQ, but I still have one question. I have a RBC direct investment TFSA and say I put 5000 in that account. Now I go to buy some stocks and pay it from that account, there is the fee for buying the stocks... does this count as being a contribution to the TFSA, or is it only the stocks that I buy? So what i'm saying, should I put a bit more than 5000 in the account, and buy 5000 worth of stocks? Thanks.

What matters is what you put into the TFSA account, so if you put in $5000 then you are at your limit, even if you use the $5000 to buy $4965 of stock + pay $35 comission.

Of course, if you had a non-TFSA account trading account somewhere you could potentially buy $5000 worth of stock + pay $35 comission, then contribute the $5000 worth of stock from your non-TFSA account to your TFSA account "in kind". Of course, the value of the contribution would be based on when the contribution took place and I assume that would take a few days to happen, so if your stock went up in that time, contributing all of it would put you over the $5000 limit, plus you'd have capital gains due. If the stock went down, you'd be able to contribute all of it and have some room left over, but you wouldn't be able to count the capital loss.

Maybe some forward thinking brokerage does or will allow you to buy outside of the TFSA for immediate in-kind contributions so you don't have to worry about the value changing. Even if the value doesn't change, you end up with a small capital loss (the comission) that you can't claim.

[phomp]

Thanks OP.

I am still a bit curious how this works. In my TFSA Investment Account with Questtrade I am up about $50. I started with the initial $5,000 and now worth about $5,050. Lets say for example I had $5,200 in my account due to increase in stock value and I sold all stocks I own. If I wanted to take out the $200 and put it in a savings account or RRSP would I still be eligbile to continue investing with the $5,000 in the TFSA?

Also, lets say for example you grow the account to $5,500 are you allowed to purchase with that $500 gain?

Thanks.

[AllWheelDrift]

Guys, it's really not that hard to understand. You're allowed to put $5000 into the account. What happens after that doesn't really matter, aside from the fact that any money you take out can be put back in next year.

So, if you put $5,000 into your TFSA and invest it all into some penny stock that goes into orbit making you $1,000,000, you don't pay any taxes on that $1 million, there's no penaties for having $1 million in your account, and you can take out $1 million tax free and do whatever you want with it. If you do take out the $1 million, next year you can contribute up to $1,005,000.

On the other hand, if you put $5000 into your TFSA account and had to pay $500 in comissions/fees and only had $4500 left, that's tough luck, because you already put your $5000 into the account. You'll have to wait until next year, at which you'll be allowed to put another $5000 in the account but that has nothing to do with the fact that you turned your previous $5000 into $4500. Oh, and if you withdrew the $4500, next year your could deposit $9500.

[FishPoo]

Guys, it's really not that hard to understand. You're allowed to put $5000 into the account. What happens after that doesn't really matter, aside from the fact that any money you take out can be put back in next year.

So, if you put $5,000 into your TFSA and invest it all into some penny stock that goes into orbit making you $1,000,000, you don't pay any taxes on that $1 million, there's no penaties for having $1 million in your account, and you can take out $1 million tax free and do whatever you want with it. If you do take out the $1 million, next year you can contribute up to $1,005,000.

On the other hand, if you put $5000 into your TFSA account and had to pay $500 in comissions/fees and only had $4500 left, that's tough luck, because you already put your $5000 into the account. You'll have to wait until next year, at which you'll be allowed to put another $5000 in the account but that has nothing to do with the fact that you turned your previous $5000 into $4500. Oh, and if you withdrew the $4500, next year your could deposit $9500.

I think you missed a part, if you withdraw the $1 million dollars you made in your TFSA, you will still only be able to contribute up to $10,000 next year. ($5,000 principal you withdrew + $5,000).

The $995,000 gains you made will be untaxed and can be withdrawn at any time, but you can't contribute it back.

[cmackie]

That's not right - you'll be able to put the entire amount you withdrew in the following year.

[phomp]

understood, thanks.