Disclaimer: Please note this article is not financial advice. The purpose of our blog is purely educational, so please consult a professional accountant or financial advisor before making any financial decision.
With all of Canada's different rules and regulations, income tax can be incredibly hard to digest, especially if you aren't certain about what you should do in the first place. That said, it’s easy to see why Canadian citizens have much to ask and concern themselves with regard to the filing of taxes.
To illustrate, most Canadian residents have been curious about whether they should list their TFSA contributions on their income tax returns. Many individuals have this question, and the answer can be a little distracting. Nevertheless, we'll break down some of the things you should keep in mind when using a TFSA account and tell you if you still need to claim it on your income tax return.
A Closer Look at TFSA
TFSA (Tax-Free Savings Account) is a special account offered by the Canadian government that allows you to save money without paying taxes on your earnings. You can put any income in it–interest, dividends, capital gains, or even freelance income.
Established in 2009, TFSA was launched in Canada with a maximum contribution of C$5,000 per year. After a few years, the annual contribution was raised to C$5,500 and remained until 2018. The donation maximum was increased to C$6,000 in 2019.
This savings account is a great asset for Canadian residents aged 18 or older who don't want to worry about the government taking a cut. With the help of TFSA, you can grow savings, save money for short-term or long-term goals, and shelter your investments from taxation.
Benefits of TFSA
If you're wondering about your financial future, this is a great time to set up this TFSA and see the endless possibilities that come with it. So here are some pointers that can help you maximize your financial gain with TFSA.
Save on taxes - All earnings and withdrawals from your TFSA are tax-free, including the income/tax returns earned on investments.
Build up your savings - A TFSA is a great way to set aside money for short-term or long-term goals. And since contributions and growth are not taxed, your savings will grow even faster.
Higher contribution limit - The contribution limit for TFSA is high enough that you can save a significant amount of money over time. In 2021, the TFSA contribution maximum was $6,000.
Flexible - To keep in your TFSA, you can buy a variety of savings and investment items, like bonds, equities, and exchange-traded funds (ETFs).
There's a lot of uncertainty around TFSAs in Canada. Some people think they can't do anything with them, while others think they're the best thing ever. TFSA offers many benefits but also has some rules you need to follow.
Is there a way to save as much money as you want without paying taxes? Do you need to file your TFSA on your tax return? Let's look and check if you can maximize your financial landscape here.
Sadly, only those residents from Canada can open this tax-free savings account. Meanwhile, TFSA account holders who become non-residents of Canada can keep their accounts and avoid paying taxes on any earnings or withdrawals. On the other hand, non-resident holders may be taxed in certain circumstances.
You'll be taxed a 1% monthly tax if you make contributions in years when you are classified as a non-resident of Canada, for example. As a result, you will find it difficult to make additional contributions. To add, TFSA will accrue no contribution room during the years of non-residency.
The maximum yearly contribution limit for 2021 is $6,000, regardless of earned income. However, your contributions mustn't go overboard so that you won't be penalized. Otherwise, you need to pay the taxes mandated by the Canada Revenue Agency (CRA) at 1% per month.
About Income Tax Return
Do you claim TFSA on your income tax return in Canada? To clarify this concern, here's the simplest answer that we can go: You can't claim it because contributions are not tax-deductible in the first place. Thus, they do not affect taxable income.
You can compare this with the Registered Retirement Savings Plan (RRSP), an example of a tax-deferred account from Canada where income/tax returns are tax-sheltered until withdrawn.
On the other hand, you need to consider a few pointers as part of the policy. If you outpace your yearly contribution limit, for example, you must pay tax on the surplus TFSA amount.
To demonstrate, if you submitted at least $600 to your TFSA in August 2020 and didn’t do anything about it for the rest of the year, you need to pay at least $6 every month. This contribution will be for the next five months until the year is finished.
Combining Tax Knowledge With Financial Planning
So, do you have to claim TFSA on your income tax return? The answer is both yes and no. It depends on how much money you contributed to your TFSA in a given year and what type of income you earned.
If you're not sure how to start with TFSA or whether or not you need to report your TFSA contributions, it's always best to speak with an accounting team for clarification. However, as long as you follow the rules and limitations surrounding TFSAs, there are many benefits you can enjoy for the rest of your saving years.
We hope this blog has cleared up any misunderstandings you may have had concerning TFSAs. As always, stay tuned to Unloop for informative tax reviews and more blog posts like this one.