Transfers between your own TFSAs and those completed upon the breakdown of a marriage or common-law partnership are considered qualifying transfers. All qualifying transfers must be completed by a financial institution.
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If you want to transfer funds from one TFSA to another or from one issuer to another, there will be no tax consequences if your issuer completes a direct transfer on your behalf. For more information, contact your issuer.
If you withdraw the funds yourself and contribute the same funds to another TFSA, this transaction would not be considered a direct transfer and could have tax consequences.
In this situation, the funds will be treated as a regular contribution which will reduce your TFSA contribution room for the year. If you do not have sufficient contribution room, you will have over-contributed to your TFSA and will be subject to a 1% tax on the highest excess TFSA amount in the month, for each month that the excess remains in the account.
Example – Qualifying transfers between TFSAs of the same individual
On May 5, 2023, Michel contributed $6,500 to his TFSA in Bank “A” leaving him with a remaining TFSA contribution room of zero.
In July, he received his TFSA statement from Bank “A” which showed there was only a minimal growth ($25) from his investment. Michel decided to talk to other financial institutions to see if they could offer a better rate of return for his TFSA investment. Michel found a better rate offered at another financial institution and decided to transfer the funds from his TFSA account to Bank “B.”
For Michel’s TFSA contributions to be considered a qualifying transfer, with no tax consequences, Bank “A” must complete a direct transfer of funds to Bank “B.”
If, instead, Michel went into Bank “A” in July, and withdrew the amount in his TFSA and walked into Bank “B” to open a new TFSA with a contribution of $6,525, the contribution would be treated as an ordinary contribution and because his unused TFSA contribution room was already zero, he would have an excess TFSA amount of $6,525 and would have to pay a 1% per month tax on the excess TFSA amount for as long as the excess TFSA amount remained in his account. The withdrawal from Bank “A” would be added back to his contribution room at the beginning of 2024.
In addition, if Michel left his contribution to Bank “B” in his TFSA for the rest of the year, his tax would be calculated as follows:
- highest excess TFSA amount per month from July to December = $6,525
- tax of 1% per month on the highest excess TFSA amount is $391.50 (6,525 × 1% × 6 months).
When there is a breakdown in a marriage or common-law partnership, an amount can be transferred directly from one individual's TFSA to the other's TFSA without affecting either individual's contribution room. The transfer must be completed directly between the TFSAs by the issuer.
If you are in this situation you must meet both of the following conditions:
- you and your current or former spouse or common-law partner were living separate and apart at the time of the transfer
- you are entitled to receive, or required to pay, the amount under a decree, order, or judgment of a court, or under a written separation agreement to settle rights arising out of your relationship on or after the breakdown of your relationship
When these conditions are met, the transfer is a qualifying transfer and will not reduce the recipient's eligible TFSA contribution room. Since this transfer is not considered a withdrawal, the transferred amount will not be added back to the transferor's contribution room at the beginning of the following year.
Also, the transfer will not remove any excess TFSA amount, if applicable, in the payer's TFSA.
If, instead of choosing to have the amount directly transferred, an individual chooses to receive the settlement amount before deciding to contribute part or all of it to their own TFSA, then any such contribution is considered as a regular contribution that reduces the balance of their TFSA contribution room.
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