I have two questions concerning the tax-free savings account. First, let’s say I have contributed a total of $90,000 to my TFSA but the account has risen in value to $120,000. If I withdraw $20,000 one year, can I contribute that $20,000 back the following year? Or am I restricted to the $7,000 annual contribution limit? Second, what happens if, instead of rising to $120,000, my TFSA falls in value to, say, $60,000, before I withdraw the $20,000?
When you make a TFSA withdrawal, the amount is added to your contribution room on Jan. 1 of the following year. Your contribution room would also include the annual limit (currently $7,000) that all TFSA holders are entitled to on Jan. 1 each year, plus any unused contribution room from previous years.
Regarding your first question, assuming you were at least 18 when the TFSA was introduced in 2009, your cumulative TFSA contribution room through 2024 would total $95,000. After subtracting the $90,000 you have already contributed, you would have $5,000 of untapped contribution room to use at any time.
If you were to withdraw $20,000 this year, that amount would be added to your contribution room on Jan. 1, 2025, plus the annual limit for that year, which we will assume remains at $7,000. So that would be $27,000 of additional contribution room, on top of the $5,000 that was carried over from previous years, for total contribution room of $32,000 as of next Jan. 1.
To answer your second question, a drop in your TFSA’s value wouldn’t change the math. You would still have $5,000 of unused contribution room, plus the $20,000 withdrawal amount that would be added back to your contribution room next year, plus the $7,000 annual limit for 2025, for a total of $32,000 – the same as in your first example.
In other words, for the purposes of calculating contribution room, it doesn’t matter whether the assets inside your TFSA go up, down or sideways. What matters is how much unused contribution room you have from previous years, the value of any withdrawals that will be added back the following year and the annual contribution limit for that year.
Still confused? The Globe and Mail has an online TFSA contribution limit calculator that will help you determine your maximum contribution. (View the calculator online at www.theglobeandmail.com/investing/personal-finance/tools/tfsa-limit/) It’s important to keep detailed records of all TFSA contributions and withdrawals so that you can determine your contribution room accurately and avoid the penalty tax of 1 per cent a month on excess contributions. A final word of caution: Don’t rely on the Canada Revenue Agency’s calculation of your TFSA contribution room, as its numbers may be out of date and not reflect your recent contributions.
Regarding your article about Canadian depositary receipts for U.S. companies, are CDRs considered foreign property? And do they need to be included on a T1135 Foreign Income Verification Statement?
Yes, and yes. According to an FAQ prepared by CIBC Capital Markets, which manages CDRs representing more than 50 U.S. companies, CDRs are considered “specified foreign property” for purposes of the Canadian tax reporting rules.
“T1135 reporting in Canada would be required for an investor that is a taxpayer resident in Canada and whose cost of CDRs of all series, plus any underlying shares of those series that are held directly, plus the cost of any other specified foreign property, exceeds $100,000,” CIBC says. (Read the full FAQ, which also discusses U.S. estate tax, under “resources” at cdr.cibc.com).
The good news is that CDRs – or any other foreign property – held in a registered account (such as a registered retirement savings plan, tax-free savings account or registered education savings plan) are excluded from Form T1135 reporting requirements. Canadian-listed exchange-traded funds and mutual funds that hold foreign property are also excluded. The same is true for personal use property such as a car or vacation home.
When preparing my taxes, I noticed that my broker recorded an incorrect adjusted cost base for one of my trades. Looking back at my statements, I saw that when shares were transferred over from another broker, the market value, not my original ACB, was entered. How can I correct this given that the tax slips are submitted directly to CRA and do not correspond to my records?
Not to worry. Simply enter the correct ACB on the T5008 Statement of Securities Transactions that you file with your tax return. As long as you have the records to justify the ACB you enter, there shouldn’t be a problem if the CRA asks any questions – assuming it even notices. These sorts of errors are not uncommon and, as long as you are honest and can back up whatever you file, you almost certainly won’t do any jail time.
E-mail your questions to jheinzl@globeandmail.com. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.
John Heinzl