Tax-free account a head scratcher
Posted Jan 31, 2011 04:40:27 PM.
This article is more than 5 years old.
Tens of thousands of Canadians who thought they were saving money in a tax-free shelter were surprised to be taxed on over-contributions.
According to a recent survey, many of us are still confused about the rules for Tax-Free Savings Accounts (TFSA). And that confusion led to more than 70,000 people being sent bills last year for contributing more to the accounts than their $5000 limit.
Chris White, a financial planner in the Northfield Drive location of Libro Financial Group, says the key to a successful investment is taking the time to learn about it before jumping in.
“The best thing to do is go to your financial institution and sit down with somebody and have a good understanding of how this program will help you or affect you,” White suggests.
Despite the widespread difficulties, White is still a fan of the TFSA.
“Although contributions are not tax deductible, similar to an RRSP, any gains or growth or income within the tax free savings account accumulate tax free,” White explains. “And, of course, all withdrawals from the tax free savings account come through tax free as well.”
In light of the confusion, White expects more educational literature to be distributed making the rules for TFSA’s more clear. And he admits the misunderstanding is easy to trace when looking back on the 2008 launch of the accounts.
“If you do happen to make a withdrawal from the tax free savings account, you have to wait until the following calendar year to replace that withdrawal,” White points out.
The key, according to White, is keeping an eye on those contributions to ensure that you don’t go over the $5000 max in any given calendar year. If you’ve reached that limit, then make a withdrawal, the money going back into the TSFA is still considered an over-contribution even though it’s only replacing what was taken out earlier.
Survey respondents also claimed to have difficulty navigating the Canada Revenue Agency’s website to find the proper rules.
