Tax-Free Savings Accounts
Taxpayers can continue to contribute to their Tax-Free Savings Account (TFSA) once they emigrate from Canada. However, there are two important caveats when considering continuing to contribute to a TFSA as a non-resident of Canada.
Contribution Room: The annual contribution room a taxpayer receives for his or her TFSA is not prorated in the year of emigration. The taxpayer will accrue the full contribution room for the tax year in which he or she emigrated. The year in which the taxpayer emigrates will be the final year he or she receives contribution room to his or her TFSA unless he or she becomes a Canadian tax resident again. As non-residents do not receive TFSA contribution room, they must ensure they do not over-contribute to their TFSA as a penalty will apply.
Penalty for contributing as a non-resident: Non-residents who contribute to their TFSA after emigrating will be charged a 1% a month penalty on these contributions until the contributions are removed from the TFSA or the taxpayer becomes a resident of Canada again. Charging of these penalties can be successfully challenged in certain circumstances. Taxpayers should speak to one of our experienced Canadian tax lawyers if they wish to challenge these penalties.
Generally speaking, continuing to contribute to a TFSA after becoming a non-resident of Canada is inadvisable.
Taxpayers do not pay departure tax on their TFSA accounts. Since withdrawals from a TFSA are not taxable, non-resident taxpayers will not pay Canadian tax on any amounts withdrawn from their TFSA after becoming a non-resident of Canada. The Section 217 election also does not apply to TFSA withdrawals. However, the amounts withdrawn may be taxed by the taxpayer’s new country of residence.
