Tax payable on non-resident contributions
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 2019, her available TFSA contribution room was $6,000.
In February 2019, she contributed $5,000 into her TFSA and on September 7, 2019, she became a non-resident. On July 12, 2020, she contributed an additional $2,500 to her TFSA. By the end of 2020, Gemma was still a non-resident of Canada, and she had not made any withdrawals from her account.
For 2020, 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 2019 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 2020 since she was a non-resident throughout that entire year. Gemma’s $2,500 contribution on July 12, 2020, 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 2020 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 2020).
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 2020. Her tax on her excess TFSA amounts was $90 ($1,500 × 1% × 6 months).
For 2020, 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 2020 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 remains 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 2018 and contributed the maximum amount he could in 2018 and 2019. His total contributions in 2020 were $1,000, and he made no withdrawals. Hassan became a non-resident of Canada on February 17, 2021. He contributed $3,000 to his TFSA on August 9, 2021. He re established his Canadian residency for tax purposes on December 8, 2021.
Hassan’s unused TFSA contribution room at the end of 2020 was $5,000 (the $6,000 limit less the $1,000 he contributed). Hassan also gained an additional $6,000 TFSA dollar limit for 2021. 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 2021. This means that as of January 1, 2021, Hassan has a total TFSA contribution room of $11,000 (the $5,000 carried over from the end of 2020 plus the annual limit of $6,000 for 2021).
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 2021. 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).
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).
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.
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