TFSA math can be tricky
You might have more TFSA contribution room than you think
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How do TFSAs work? It’s not as simple a question as it might seem.
Let’s start with the simple part. We know the government has steadily increased the dollar contribution limit in the ensuing years since the TSFA was introduced in 2009. As of 2017 that figure stands at $52,000. It will go up another estimated $5,500 on January 1st, pushing the total limit to $57,500. That much is clear.
Where it gets complicated is in figuring how much total room you have. So, if you were 18 or older in 2009, what is your contribution room? The answer: it depends. Some Canadians have contribution limits much higher than the dollar room granted. Confused? You’re not alone. This tripped us up, too when we built a tool to help readers do their own TSFA contribution limit calculation.
Here is how it works. Let’s say you turned 18 in 2009 and used up every cent of your contribution room. And, thanks to some fortuitous stock picking, you were able to grow your TFSA to $100,000. Realizing your luck, you decide to finally make a withdrawal, using it all for a down payment on a cottage. What is your contribution room on the first day of the new year?
The answer: $105,500
How your TFSA room is calculated
Here’s why. Your own personal TFSA contribution room is determined by the following:
- your TFSA dollar limit;
- any unused TFSA contribution room from previous years; and
- any withdrawals made from the TFSA in the previous year.
Here’s how the illustration above breaks down. Your TFSA dollar limit is $52,000. Because in our scenario we used it up, there is no contribution room from previous years. As you have no room left in your TFSA, your $100,000 withdrawal forms the basis of your room starting in January, plus the extra $5,500 annual increase.
The key thing to remember is that any amount you withdraw—regardless of whether it was your original contribution, a gain from appreciation while held in the TFSA, dividends or interest—qualifies to be put back in at a later time.
Our mistake
Our mistake when we recently launched our TFSA calculator was for thinking the contribution limit was a hard cap that works along the same lines as an RRSP. (Sorry.) As a testament to our readers, several spotted our error and were quick to correct us.
While that formula can work to your advantage if your TFSA performs well, it can also work against you. Consider the example above, but this time, instead of growing your TFSA to $100,000, you lose all of your money. Should the unthinkable happen you’d only be allowed to put in $5,500 next year—the amount of the annual increase.
If you’ve made a number of withdrawals and contributions over the years call the CRA and they will tell you exactly how much room you have. All you need is your most recent Notice of Assessment. But Dan Bortolotti, an associate portfolio manager at the PWL Capital in Toronto, says it’s best to wait until early March to make the call to ensure the CRA has been able to provide you with most current figures.
Visit the CRA for more information on making or replacing withdrawals from a TFSA.
First published March 31, 2017
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So if you’ve made full contributions to a TFSA over the years, made a nice return and withdraw everything, you can put back everything the next year? I think this is specious advice. I called the CRA about this very matter on July 7 2019, wanting to get reliable information right from the horse’s mouth. I was told by a CRA official the only part of a withdrawal that qualifies to be put back in the TFSA the next year is the past contribution amount and NOT the accumulated gains. If the CRA doesn’t know their own rules then who does?
To Robert, how does CRA know which part is contribution and which part in gains? I looked at the TFSA report from my bank on my CRA account. it just shows the number contributed as a whole (not separated my contribution and gains)
Thanks for the question Cady,
Due
to the large volume of comments we receive, we regret that we are unable to respond directly to each one. We invite you to email your question to [email protected],
where it will be considered for a future response by one of our expert columnists. For personal advice, we suggest consulting with your financial institution or a qualified advisor.