Tax payable on TFSAs
Generally, interest, dividends, or capital gains earned on investments in a TFSA are not taxable either while held in the account or when withdrawn.
There are, however, certain circumstances under which one or more taxes could be payable with respect to a TFSA. The following sections provide information and examples of when and how these taxes are payable, and by whom.
Normally, in most TFSA situations, there is no tax payable, and therefore, a TFSA return is not required; however, where one or more of TFSA taxes are payable a TFSA return is required must be filled out and sent by June 30, of the year following the calendar year in which the tax arose.
Most TFSA holders have no tax payable related to their TFSA investments, and no TFSA tax return has to be filed. However, when TFSA taxes are applicable for a year, Form RC243, Tax-Free Savings Account (TFSA) Return, must be filed by June 30, of the following year. Any tax owing must also be paid by that date.
The RC243-SCH-A, Schedule A – Excess TFSA Amounts and RC243-SCH-B, Schedule B – Non-Resident Contributions to a Tax-Free Savings Account (TFSA) will assist you in determining your tax liability.
If a TFSA return is required but has not been filed, we can use information provided by your issuers to calculate any tax payable by you.
You can view filed TFSA returns and schedules online by going to My Account.
If the TFSA trust acquires a prohibited investment or if previously acquired property becomes prohibited, the investment will be subject to a special tax equal to 50% of the fair market value (FMV) of the investment, and the holder must file Form RC243, Tax-Free Savings Account (TFSA) Return.
The tax is refundable in certain circumstances. For more information, see Refund of taxes paid on non-qualified or prohibited investments.
If the prohibited investment ceases to be a prohibited investment while it is held by the TFSA trust, the TFSA trust is considered to have disposed of and immediately re-acquired the property at its FMV.
The holder is also liable for the 100% advantage tax on income earned and capital gains realized on prohibited investments.
The 100% advantage tax applies to income earned, and the portion of any realized capital gain that accrued, regardless of when the prohibited investment generating the income or gain was acquired.
Note
If an investment is both a non-qualified investment and a prohibited investment, it is treated as a prohibited investment only.
For more information, see Income Tax Folio S3-F10-C2, Prohibited Investments – RRSPs, RESPs, RRIFs, RDSPs and TFSAs.
If the holder or a person not dealing at arm's length with the holder (including the TFFSA itself) was provided with an advantage in relation to their TFSA during the year, a 100% tax is payable which is:
- in the case of a benefit, the fair market value (FMV) of the benefit
- in the case of a loan or a debt, the amount of the loan or debt
To calculate the taxes payable on an advantage extended you must fill out Form RC243, Tax-Free Savings Account (TFSA) Return.
Note
When an advantage is extended by the issuer of a TFSA, the issuer, and not the holder, is liable for the tax. The issuer must file Form RC298, Advantage Tax Return for RRSP, TFSA, or RDSP Issuers, RESP promoters or RRIF Carriers.
For more information, see Income Tax Folio S3-F10-C3, Advantages - RRSPs, RESPs, RRIFs RDSPs, and TFSAs.
If the TFSA trust acquired a non-qualified investment, or if a previously acquired property becomes a non-qualified investment, the investment will be subject to a special tax. The tax is equal to 50% of the FMV of the property at the time that it was acquired or that it became non-qualified, and the holder must file Form RC243, Tax-Free Savings Account (TFSA) Return.
The tax is refundable in certain circumstances. For more information, see Refund of taxes paid on non-qualified or prohibited investments.
Each person who is a holder is also liable for the 100% advantage tax on specified non-qualified investment income if this income is not withdrawn promptly.
Note
Income earned and capital gains realized by a TFSA trust on non-qualified investments will continue to be taxable to the trust, regardless of when the investment was acquired. If an investment is both a non-qualified and a prohibited investment, it is treated as a prohibited investment only and the trust is not subject to tax on the investment earnings.
For more information, see Income Tax Folio S3-F10-C1, Qualified Investments - RRSPs, RESPs, RRIFs, RDSPs and TFSAs.
Obligations of the TFSA issuer
The issuer of a TFSA must exercise the care, diligence and skill of a reasonable prudent person to minimize the possibility that a trust governed by the arrangement holds a non-qualified investment.
If the issuer fails to comply with this obligation, the issuer is liable to a penalty under the Income Tax Act (ITA).
The issuer is also required to notify the holder of the TFSA in prescribed Form and manner before March of a calendar year, if at any time in the preceding year the TFSA trust acquired or disposed of a non-qualified investment, or if an investment became or ceased to be a non-qualified investment.
If, at any time during the year, your TFSA contains contributions (other than a qualifying transfer or an exempt contribution) you made while a non-resident of Canada, you will be subject to a tax of 1% per month on these contributions.
Example 1 – Tax payable on non-resident contributions
Gemma is 41 years of age and a Canadian resident. At the start of 2021, her available TFSA contribution room was $6,000.
In February 2021, she contributed $5,000 into her TFSA and on September 7, 2021, she became a non-resident. On July 12, 2022, she contributed an additional $2,500 to her TFSA. By the end of 2022, Gemma was still a non-resident of Canada, and she had not made any withdrawals from her account.
For 2022, Gemma had to pay a tax on the contribution she made while she was a non-resident and she was also subject to tax on the excess TFSA amount in her account.
Gemma’s unused TFSA contribution room at the end of 2021 was $1,000 (the TFSA dollar limit of $6,000 less her contribution of $5,000). Gemma was not entitled to the TFSA dollar limit of $6,000 for 2022 since she was a non-resident throughout that entire year. Gemma’s $2,500 contribution on July 12, 2022, resulted in an excess TFSA amount in her account at that time of $1,500. This is the amount by which her contribution exceeded her available room.
Gemma’s tax on non-resident contributions for 2022 was $150 because the full amount of her $2,500 contribution was made while she was a non-resident and it remained in her account until the end of the year. Since the tax is equal to 1% per month, the tax on her non-resident contributions was $150 ($2,500 × 1% × the 6 months from July to December 2022).
Since part of Gemma’s contribution while a non-resident also created an excess TFSA amount ($1,500, as described above) in her account, she also had to pay the 1% tax per month on this amount from July to December 2022. Her tax on her excess TFSA amounts was $90 ($1,500 × 1% × 6 months).
For 2022, Gemma had to pay a total tax of $240 on her TFSA, made up of $150 in tax on her non-resident contribution plus $90 in tax on her excess TFSA amount.
Gemma will not accumulate any room in 2022 unless she re-establishes Canadian residency in that year. She will have to withdraw the entire $2,500 she contributed while she was a non-resident to avoid an additional tax of 1% per month on the non-resident contributions as well as on the $1,500 excess TFSA amount.
This tax, calculated on the full amount of the contribution, will apply for each month that any portion of the amount contributed while a non-resident stays in the TFSA and will continue to apply until whichever of the following happens first:
- the contributions are withdrawn in full from the account and designated as a withdrawal of non-resident contributions
- the individual becomes a resident of Canada
An individual is not subject to the tax of 1% on non-resident contributions for the month in which the full amount of the contribution is withdrawn or, if applicable, the month in which Canadian residency is resumed.
Example 2 – Tax payable on non-resident contributions
Hassan is 25 years of age and a resident of Canada. He opened a TFSA in 2020 and contributed the maximum amount he could in 2020 and 2021. His total contributions in 2022 were $1,000, and he made no withdrawals. Hassan became a non-resident of Canada on February 17, 2023. He contributed $3,000 to his TFSA on August 9, 2023. He re-established his Canadian residency for tax purposes on December 8, 2023.
Hassan’s unused TFSA contribution room at the end of 2022 was $5,000 (the $6,000 limit less the $1,000 he contributed). Hassan also gained an additional $6,500 TFSA dollar limit for 2023. This is because this amount is not pro-rated in the year an individual becomes a non-resident, and he was considered a Canadian resident for part of 2023. This means that as of January 1, 2023, Hassan has a total TFSA contribution room of $11,500 (the $5,000 carried over from the end of 2022 plus the annual limit of $6,500 for 2023).
Even though he has unused TFSA contribution room, a tax is payable if any contributions are made while he was a non-resident. Since he contributed $3,000 while he was a non-resident, he would have to pay a tax of 1% of this amount for each month from August to November 2023. He is not subject to tax for December as he re-established Canadian residency in that month.
Accordingly, Hassan had to pay $120 in tax based on his non-resident contribution ($3,000 × 1% × 4 months).
Note
Unlike in the case of excess TFSA contributions where a partial withdrawal can reduce the tax payable, a partial withdrawal of a contribution made while a non-resident does not proportionately reduce the tax otherwise payable. It is necessary for the full amount of a non-resident contribution to be withdrawn in order for the full tax to no longer apply.
For any year in which tax is payable by the holder of a TFSA on contributions made while a non-resident, it is necessary to fill out and send Form RC243, Tax-Free Savings Account (TFSA) Return, and Form RC243-SCH-B, Schedule B – Non-Resident Contributions to a Tax-Free Savings Account (TFSA).
Note
In addition to the tax of 1% per month on the contributions made while a non-resident, you could also be subject to a separate tax of 1% per month if any of the same contributions create an excess amount in your TFSA. To determine whether you have excess TFSA amounts, you will need to fill out Form RC243-SCH-A, Schedule A – Excess TFSA Amounts.
If you disagree with the assessment or reassessment of your TFSA tax payable, contact us for more information. If you still disagree, you can make a formal objection by sending a filled out Form T400A, Notice of Objection – Income Tax Act, or a signed letter to the Chief of Appeals at your tax services office or tax centre within 90 days of the date of the notice of assessment or notice of reassessment.
For more information, see Pamphlet P148, Resolving your dispute: Objections and Appeal Rights under the Income Tax Act.
Forms and publications
- Form RC243, Tax-Free Savings Account (TFSA) Return
- Form RC243-SCH-A, Schedule A – Excess TFSA Amounts
- Form RC243-SCH-B, Schedule B – Non-Resident Contributions to a Tax-Free Savings Account (TFSA)
- Form T400A, Notice of Objection – Income Tax Act
- Pamphlet P148, Resolving your dispute: Objections and Appeal Rights under the Income Tax Act
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