Tax-free Savings Accounts are relatively simple to understand and use, but they do have some quirks that can be confusing. Pay special attention to these rules when you make your TFSA contribution and you’ll be cruising toward higher investment gains in no time.
// 1 // Whatever amount you withdraw from a TFSA is added to your contribution room in the following calendar year. It doesn’t matter whether the withdrawn amount is just your original contribution or the interest, dividends or capital gains your investments earned. And just as capital gains are not taxable in a TFSA, capital losses are not deductible.
// 2 // Interest, dividends and capital gains in your TFSA are not considered income, even when you withdraw the money. That means federal income-tested benefits and credits such as Old Age Security, the Guaranteed Income Supplement and the Canada Child Tax Benefit will not be reduced as a result of investment growth inside your TFSA.
// 3 // Interest on money borrowed to invest inside a TFSA is not tax-deductible.
// 4 // Accidental overcontributions to a TFSA are subject to a penalty of 1% for each month the overcontribution remains in the account. Deliberate overcontributions are subject to a penalty tax of 100% of income or gains from the overcontribution.
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