TFSA Implications:

If you are a Canadian Resident (for income tax purpose) who has been 18 years or older since 2009, you'd have a TFSA limit of $46,500 today.  TFSA is an important tool for your long term savings. There are a few things you must keep in mind while operating a TFSA account.

1)      Over-contribution: Over-contribution could be very costly, any amount that you over-contribute is subject to 1% tax every month until you withdraw the over-contribution. To put this into perspective, if you have over-contributed $10,000 in January of a given year, and you have not withdrawn the over-contribution throughout the year, you will have a TFSA tax of $1,200. And it does not end here, if you do not file the TFSA return and pay the taxes, you may become subject to other fines, penalties and interests.  There are several reason for this mistake:

a.       You simply over contribute without calculating your TFSA limit

b.      You calculated an amount in your limit where in that year you were not eligible to get TFSA limit:

                                                         b.i.      If you are under age of 18, you do not accumulate TFSA limit

                                                       b.ii.      If you are non-resident of Canada in any given year, you do not accumulate TFSA limit.

c.       You withdraw an amount from your TFSA in the year that only gets restored in the next calendar year. Therefore, if you re-contribute that same amount in the same year and you have already reached your contribution limit, it will be considered as over-contribution.

2)      Naming beneficiary instead of successor holder: As a successor holder that person becomes the new holder of your TFSA and its tax free status is automatically preserved, on the other hand as a beneficiary there will be no tax implication in case of death but there will be extra paper work and any income earned after the death and increase in FMV or income will be subject to tax.

3)      Foreign Income:  Foreign dividend paid to a TFSA is subject to withholding tax, a non-registered account is a better choice for foreign dividend paying investment.  A non-registered account will enable taxpayer to claim foreign tax credit to offset the withholding tax deducted.

4)      Market loss: Market losses can impact your contribution room. If there is a change in the value of your entire TFSA account, it will impact your withholding, and you can recontribute only what you withhold excluding the new limits. Fortunately, the opposite is true for gains; therefore, if you close all your accounts, and open a new one, ensure that you are only contributing up to your limit. You should contact your tax specialist to ensure the proper limit.

5)      TFSA investment must be eligible: You need to make sure the investment you are putting in your TFSA is eligible for TFSA investment.  The securities that are not traded through recognized stock exchange will not be eligible for TFSA investment. This may result in tax implications.