TFSA Update – Year End 2015

Tax Free


Update: The federal government has clarified their plans for the Tax-Free Savings Account (TFSA).  The TFSA contribution limit for 2016 will be reduced to $5,500 as planned.  Everyone will be able to carry any unused contribution room into the next year, giving a cumulative contribution limit of $46,500 for 2016.


Our last article about the Tax-Free Savings Account (TFSA) was almost a year ago.  In that article we reminded our readers that the TFSA contribution limit was being increased to $10,000 as of January 1, 2015.  This is a significant increase from the previous level of $5,500 in 2014.  When the TFSA contribution limits of all previous years are combined, the cumulative total will be $41,000 for 2015.

This contribution limit does not include the added room from any withdrawals you made the year prior.  Remember, any amount of money you withdraw from a TFSA can be put back in the following year without a penalty.  For a detailed refresher on how the TFSA works, refer to our first article on the topic.

Now it looks very likely that due to Canada's new federal government, another change to the contribution limit is coming. The new government promised during their election campaign that they would undo the contribution limit increase and bring back the TFSA limit to previous levels.

No concrete plans have been announced yet, but there are several possibilities to consider.  The worst case scenario is that the government may retroactively lower the limit for 2015 back to 5,500.  This could mean that anyone who contributed more than that amount would have to withdraw the additional cash or be subject to penalties.  Fortunately, this is the least likely scenario since it would penalize people who were simply following the rules and not doing anything wrong.  This scenario would also create a very large amount of work for the Canada Revenue Agency (CRA) with no guarantee that they will be able to track down everyone who over-contributed.

The best case scenario is that the government maintains the $10,000 contribution limit for 2015 and 2016.  Since changes to taxation are usually announced while presenting a budget to parliament, the change to the TFSA may not even happen until partway into 2016.  In that case we would get two years where we can make $10,000 contributions.

A more likely scenario will be somewhere in the middle, where the government will maintain the $10,000 limit for 2015 and then lower it to $5,500 for everyone 2016.  In this case the cumulative contribution limit for the TFSA will be $46,500 in 2016.  However, one last possibility is that the government maintains the $10,000 limit for 2015, but compensates for it setting the cumulative limit to $42,000.  This means anyone who contributes $10,000 in 2015 will only be able to contribute $1,000 to their TFSA in 2016.

Once the change is officially announced, it will be very important for everyone to check their available TFSA limit to make sure they have not over contributed. Remember, the penalties for over contributing are very high, 1% per month of the excess amount. The best course of action at this time is to continue investing in your TFSA, but keep close track of the amount you are contributing just in case. Even with the uncertainty, the TFSA remains a very important and valuable savings tool and investors should continue to save and invest with the tax-free account.

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