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Tax Free Savings Accounts still causing taxpayer confusion
Tax Free Savings Accounts (TSFA) may be a legal tax shelter but a recent survey by ING Direct shows Canadians are still trying to figure out the best way to use them.
The Tax Free Savings Account (TFSA) may be four years old but it is still causing confusion. A recent ING Direct survey showed many still struggle to understand how these work.
First of all, a TFSA is not like a Registered Retirement Savings Plan (RRSP); you do not receive a tax deduction for a TFSA contribution. But according to the survey, 35 per cent of Canadians were unsure on this point. There is a tax benefit, but it is different: you do not report the income within the TFSA on your tax return. This is because you do not pay tax on that income.
Understanding your contribution room is another major problem. The ING Direct survey showed 23 per cent of Canadians thought their bank is responsible for tracking TFSA contributions or withdrawals. And 12 per cent thought the government should do it. Although the CRA does track contributions, the taxpayer is ultimately responsible for ensuring that he does not over-contribute.
The main problem is figuring out the contribution limit. Once you turn 18, you receive $5,000 of TFSA contribution room every year. The key is you can only add funds totalling $5,000 in one calendar year. If you deposit $5,000 in June and take out $1,000 in September, you will have to wait until January of the next year to re-contribute the $1,000.
You cannot treat your TFSA like a regular savings account: the number to watch is not the ongoing balance but rather how much money in total you have deposited. Some people found this out the hard way in the first year, when the Canada Revenue Agency (CRA) sent letters detailing an over-contribution and resulting penalties.
Your Notice of Assessment should include your TFSA contribution limit, as well as the summary of your tax return and RRSP contribution room. But the CRA is only a collector of data from the banks and financial institutions. So make sure you keep records and know your contribution limits. This is especially true if you have multiple TFSA accounts.
Doug MorganMaster tax pro and franchise owner
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