TFSA December manoeuvre

If you have money deposited in your TFSA and want to move some of that money elsewhere (to a TFSA at another financial institution), it can be advantageous to make a withdrawal as late in the year as possible, essentially late in December.

TFSA withdrawals are added back to your TFSA contribution room, but only in January 1 of the following calendar year.

Many Canadians make the mistake of withdrawing money from a TFSA, and then re-contributing that money the same year when they do not have any contribution room available. The Canadian government charges a penalty of 1% per month on the over-contribution. You can appeal this penalty if the withdrawal was an honest mistake.

If you want to transfer TFSA money between financial institutions during the calendar year without affecting your contribution room, you must complete the relevant transfer form at the destination financial institution. Most financial institutions charge a transfer out fee (which might be covered by the receiving financial institution if you ask), and there is also the added inconvenience of completing the forms to arrange the actual transfer and waiting for the transfer to take place. Withdrawing money (that is not locked in, such as in a GIC) from a TFSA to a chequing or savings account at the same institution is usually instantaneous and free.

By withdrawing the money late in December, you reduce the number of days that the money is held outside of the TFSA. Thus, you can re-contribute that amount (plus the next year’s additional contribution room) only a few days later once the next calendar year has arrived. And you can do this manoeuvre yourself without having to fill in any forms.

For more reading, see our article on Tax Free Savings Account year-end tips.