There was some discussion on the weekend about the Tax Free Savings Account (TFSA). I have talked to Canada Revenue Agency (CRA) today to confirm some things. Strato-tax was going to also contact them to verify. This is what I have......

Tax Free Savings Account (TFSA) for Canadian residents.

TFSA contribution room accumulates every year that you are 18 or older and a resident of Canada throughout the year. You do not have to set up a TFSA to earn contribution room. So, if you are eligible and did not open a TFSA this year you can contribute $10,000 in 2010.

Interest charged on money borrowed to contribute to a TFSA is not deductible for income tax purposes.

You cannot contribute more than your qualifying limit per year. If you have contributed $5,000 in 2009 and withdraw $1,000 you cannot put the $1,000 back in until 2010. In 2010 you will be allowed $6,000, your $5,000 for 2010 and the $1,000 from 2009.

On the CRA site it states “Any amounts withdrawn from an individual's TFSA in a year will be added to the individual's contribution room for the following year.” I have just been advised by CRA that there is no limit to that. So, if you withdraw $12,000 today you will be able to put back that $12,000 next year along with your $5,000 for next year. Having said that, when I previously enquired many months ago I was told by a supervisor that there is a $5,000 limit on that. When I just asked if I could speak with a senior advisor as Strato had suggested I was told that someone would get back to me within 3 business days. I will advise when I talk to them.

On the CRA website I read that the penalty for over contribution is 1%. The person I spoke with says it is still 1% but others on the forum have said that this may now be 100%. I have read that myself but don’t know if it has been implemented yet. I’ll ask when I get my chance within the next 3 business days.

You can name beneficiaries other than a spouse. If your spouse is listed as the sole beneficiary then the plan can continue with your spouse listed as the plan holder. If your spouse is not the sole beneficiary or if you have listed others as your beneficiary or if you have not listed beneficiaries then any beneficiaries of your estate are treated as survivors. All earnings accrued before death remain tax free to the beneficiaries. Earnings accrued following death until the plan is closed become taxable to the beneficiary. I have copied in that section below from the CRA website.Hope it helps……….

Death of a TFSA Holder

General rules

When the holder of a deposit or an annuity contract under a TFSA dies, the holder is considered to have received, immediately before death, an amount equal to the fair market value (FMV) of all the property held in the TFSA at the time of death.

After the holder's death, the annuity contract is considered to be a separate contract and is no longer considered as a TFSA. All earnings that accrue after the holder's death will be taxable to the beneficiaries.

Generally, amounts paid from the TFSA that represent the income earned in the TFSA after the date the holder died have to be reported by the holder's beneficiaries. These payments have to be included in the income of the beneficiaries for the year they are received.

A beneficiary will not have to pay tax on any payments made out of the TFSA that do not exceed the FMV of all the property held in the TFSA at the time of death.

Spouse or common-law partner is the sole beneficiary of the TFSA

The deceased holder is not considered to have received an amount from the TFSA at the time of death if, in the TFSA contract, the deceased holder named his or her spouse or common-law partner as the sole beneficiary of the TFSA. In this situation, the TFSA continues and the spouse or common-law partner becomes the successor holder under the plan.

If at the time of death there was an excess TFSA amount, the successor holder is deemed to have made, at the beginning of the month following the date of death, a contribution to their TFSA equal to the amount of the excess TFSA amount. If that contribution creates an excess contribution to the successor holder's TFSA, they will be subject to a 1% tax per month on the highest amount for each month they are in an overcontribution position.

If, in the TFSA contract, the holder named his or her spouse or common-law partner and someone else as beneficiaries of the TFSA, we consider that there is no successor holder. The spouse or common-law partner would be considered a survivor.

Other beneficiaries

When no spouse or common-law partner is named in the TFSA contract, the deceased holder's estate becomes entitled to receive the TFSA property. If the deceased's will states that the spouse or common-law partner is entitled to the amounts paid under the TFSA, or that the spouse or common-law partner is the sole beneficiary of the estate, the spouse or common-law partner becomes the survivor.

The TFSA that becomes a trusteed arrangement is deemed to continue to be a TFSA until the end of the exempt period, which is the end of the calendar year following the year in which the holder dies, or when the trust ceases to exist, if earlier.

All income earned during the exempt period and paid to the beneficiaries, including a survivor, will be included in their income, while earnings that accrued before death would remain exempt.

The survivor may contribute payments made within the exempt period to them from a deceased holder's TFSA into their own TFSA without affecting their unused TFSA contribution room limit. Such survivor payments become an exempt contribution.

In order for the survivor to designate an exempt contribution, the survivor must designate their survivor payments as an exempt contribution on Form RC240, Designating an Exempt Contribution to a Survivor Tax-Free Savings Account (TFSA) within 30 days after the day on which the contribution is made.

An exempt contribution cannot exceed the payment received during the exempt period and the FMV of the deceased holder's TFSA at the time of death.

Donation upon death

If a qualified donee was named as a beneficiary of the deceased holder's TFSA, the transfer of funds to the qualified donee must generally occur within the 36-month period following the holder's death.