Common mistakes on TFSA

The name TFSA – Tax Free Saving Account can be quite misleading or confusing. Some people think that it is the same as a regular bank saving account. Moreover, certain banks only offer TFSA account with such limited function. This further confirms their misunderstanding.  In fact, TFSA can be used to hold all kind of investments such as stocks, bonds, mutual funds, ETF, etc.   Many online discount brokerages offer that. Please check out this.

Here is another common error I found. Some people were very surprised to receive a tax slip T5008 which reports the amount paid or credited to you for securities you disposed of or redeemed during the year. They firmly believe that they should not because the securities are with TFSA and the earnings should not be taxed. However, here is what actually happened.  They sold the securities in a margin account first and then put the money into the TFSA. That’s why they believe the money should not be taxed. They didn’t know the transactions have to happen within the TFSA for it to be tax-sheltered.  

They can first transfer the security in kind to the TFSA if there is sufficient contribution room left and then sell security.

The other one is the contribution room. Make sure you track it. If you don’t have any contribution room left and you withdraw $5K, make sure you only put the $5K back to the TFSA next year rather than this year. Otherwise, you will have to pay a tax equal to 1% of the highest excess TFSA amount in the month, for each month that the excess amount remains in your account.

Last but not least, some thought they opened a TFSA or RRSP, but they actually opened a margin account. They didn’t find it out until they received the tax slip. It is never too late to learn. Everyone is at different stage of their journey. A bit more knowledge is a solid step forward. I am very happy that you take this step today.

Published by Worthfy

Financial literacy and counselling

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