The Tax Free Savings Account has been part of the financial services vernacular since its inception in 2009. For the past 12 years, Canadians have been able to take advantage of tax-free investment growth.
The concept seemed simple – deposit money into the account, invest the funds into an investment, watch it grow with absolutely no tax implication. End of story.
Since the beginning in 2009, the annual amount that one could contribute into a TFSA has increased. Initially starting at $5,000/year, it has slowly increased to $6,000/year with one year (2015) allowing a contribution of $10,000. As of January 2021, the maximum that one could contribute into a TFSA is $75,500.
As simple as the concept may seem, there are still questions posed on the regular regarding withdrawals and how it impacts contribution room.
Unlike an RRSP, any amount withdrawn from a TFSA is recovered as contribution room in the following calendar year. This rule allows investors to still benefit from the maximum room allowable even if short term needs from the TFSA arise.
For example: Sally has maximized her contributions to 2021 ($75,500) and invested wisely to grow her TFSA to $100,000. Sally is in the middle of a real estate transaction and requires the $100,000 to bridge between the purchase and sale. She withdraws $100,000 from the TFSA with the intention of returning it to her TFSA after the sale of her property. Sally withdraws her funds in December and is able to return her funds into the TFSA in January of 2022. In addition, she has another $6,000 in contribution room due to the new year. According to the CRA, total TFSA contribution room in 2022 would be $81,500 but Sally could contribute $106,000 because of the amount withdrawn in 2021 plus the 2022 contribution room.
Conversely, the same rule can be detrimental to an unsavvy investor. In this example, Sam has maximized his contributions to 2021 ($75,500) but due to poor performance, has a market value of $50,000. He withdraws his $50,000 in December 2021 and has the funds to return it to the TFSA in January 2022. Instead of being able to contribute $81,500, as allowable by CRA, Sam can only contribute $56,000 due to his withdrawal of $50,000 in 2021 plus the 2022 contribution room.
The CRA is not concerned with the performance within the TFSA. Contribution room is determined by money in and money out.