Examples – Tax payable on non-resident contributions
Gemma is 41 years of age and a Canadian resident. At the start of 2018, her available TFSA contribution room was $5,500.
In February 2018, she contributed $4,500 into her TFSA and on September 7, 2018, she became a non-resident. On July 12, 2019, she contributed an additional $2,500 to her TFSA. By the end of 2019, Gemma was still a non-resident of Canada, and she had not made any withdrawals from her account.
For 2019, 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 2018 was $1,000 (the TFSA dollar limit of $5,500 less her contribution of $4,500). Gemma was not entitled to the TFSA dollar limit of $6,000 for 2019 since she was a non-resident throughout that entire year. Gemma’s $2,500 contribution on July 12, 2019, 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 2019 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 2019).
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 2019. Her tax on her excess TFSA amounts was $90 ($1,500 × 1% × 6 months).
For 2019, 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 2019 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.
Hassan is 25 years of age and a resident of Canada. He opened a TFSA in 2017 and contributed the maximum amount he could in 2017 and 2018. His total contributions in 2019 were $1,000, and he made no withdrawals. Hassan became a non-resident of Canada on February 17, 2020. He contributed $3,000 to his TFSA on August 9, 2020. He re established his Canadian residency for tax purposes on December 8, 2020.
Hassan’s unused TFSA contribution room at the end of 2019 was $5,000 (the $6,000 limit less the $1,000 he contributed). Hassan also gained an additional $6,000 TFSA dollar limit for 2020. 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 2020. This means that as of January 1, 2020, Hassan has a total TFSA contribution room of $11,000 (the $5,000 carried over from the end of 2019 plus the annual limit of $6,000 for 2020).
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 2020. 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).
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