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Despite limits to how much you’re allowed to contribute to your TFSA, there are no limits to how many accounts you can have. You’re allowed to open as many TFSA accounts as you like, as long as you stay within your contribution room between them.
There may be times when you’ll want to transfer funds or investments from one TFSA to the other. Perhaps you’re not satisfied with your current financial institution and want to switch banks. Or maybe you need to move money between two different types of TFSA accounts—from a savings account to a self-directed account, for example.
Below are some important things to keep in mind when transferring funds between TFSAs in order to avoid any tax consequences.
TFSA Transfer Rules
Whether you already have multiple TFSAs open and you wish to transfer funds between them, or currently have just one TFSA and would like to open a new one and transfer some money to it, your issuer must make a direct transfer on your behalf for there to be no tax consequences. This is the case regardless of whether the transfer is happening between TFSAs at the same financial institution, or from your current issuer to a completely new provider. When your issuer completes the transfer on your behalf, this is known as a %i qualifying transfer
If you make a TFSA withdrawal and contribute the funds you withdrew to another TFSA, it’s not considered a qualifying transfer and there could be tax consequences. That’s because there’s a limit to the amount you can contribute to your TFSA. When you withdraw money you get that amount back as future contribution room, but not until the following year. If you withdraw from one TFSA account to contribute to another, you risk going over your contribution room limit. You will be a charged a 1% penalty on the over-contributed amount in your TFSA for every month that you’re over your limit.
Let’s assume you’re out of TFSA contribution room and withdraw $5,000 at the beginning of the year. In July, you decide to re-contribute the $5,000. You’ll be charged 1% of this amount ($50) every month as long as the over-contribution stays in the account. If you leave the money in the account for the remaining six months, you’ll pay a tax penalty of $300.
Transferring to Your Spouse or Common-law Partner’s TFSA
The other way that funds can be transferred from one TFSA to another without having any tax consequences or having any effect on your contribution room is when you transfer money to your spouse or common-law partner after the breakdown of your relationship (a separation or divorce, for example).
When it comes to transferring funds from your TFSA to that of a current or former spouse or common-law partner when your relationship breaks down, there are two important criteria to meet in order for the transfer to be considered a qualifying transfer:
- you must be living apart from your current or former spouse or common-law partner at the time the transfer is made; and
- there has to be either a court order or a written separation agreement that entitles you to receive, or requires you to pay, a settlement amount to/from your former spouse or common-law partner.
If both of these conditions are met, the transfer will count as a qualifying transfer and there will be no tax consequences, nor will there be any effect on either person’s contribution room. In addition, the person who’s required to pay won’t be able to re-contribute the amount that he or she has transferred back into his or her account the following year, because the transfer isn’t considered a withdrawal.
The person who’s entitled to receive money from the other can choose to receive the funds personally instead of having them directly transferred to his or her TFSA. If he or she contributes the funds to his or her TFSA on their own, it’ll count as a regular contribution, and all the normal rules surrounding contribution room will apply.
TFSA Transfer Fees and Tax Consequences
Most financial institutions charge a transfer fee you when you want to transfer your TFSA account (full or partial) to another institution—and it is not an insignificant amount. Depending on your issuer, the transfer fee you’re charged can be as much as $100.
To avoid these hefty fees, you should instead take advantage of the re-contribution rule: Withdraw the funds from your current TFSA near the end of the calendar year, and in the following year, open a new account at the financial institution of your choosing and recontribute your withdrawal to it. For example, on Dec. 31 of any given year, you can withdraw all of the funds from your TFSA at your existing financial institution. And on the first business day of the following year, you can put the funds into your new TFSA at your new financial institution. Also, if you have a self-directed account and a significant amount of money in your TFSA, some financial institutions may pay this fee for you to earn your business.
Naming a TFSA Beneficiary or Successor Holder
When you open a new TFSA, you’ll be asked to name a beneficiary to inherit your TFSA upon your death. If you’re married or are in a common-law relationship, you can choose to name a successor holder instead of a beneficiary. The difference between the two designations lies in what happens to your TFSA after your death.
The successor holder becomes the new holder of the TFSA and all of its contents. Your spouse or common-law partner is entitled to an exempt contribution and doesn’t need to have any contribution room for this to occur. He or she can keep the account separate or transfer the assets into their own TFSA and no taxes need to be paid.
If you name a spouse or common-law partner as a beneficiary, it’s a little more complicated. The assets are allowed to be contributed to the survivor’s TFSA without requiring contribution room. This is also an exempt contribution and it must be done on or before Dec. 31 of the year following your death. Your survivor must also send Form RC240 to the Canada Revenue Agency (CRA) within 30 days of making the contribution. If the TFSA grew in value after your death before it was distributed to your survivor, the survivor will need additional TFSA contribution room to shelter any investment income earned.
If someone else is designated as a beneficiary, he or she can receive the assets without paying any tax. However, future income earned on those assets after death are taxable. If the beneficiary has unused contribution room, he or she can put the inherited assets into a TFSA to shelter all amounts from being taxed.
By naming a beneficiary or successor holder, probate fees can generally be avoided. In Quebec, things are different. The assets can only be transferred through the estate.