How Is TFSA Contribution room determined? Do ALL withdrawals increase the max? | Tax Free Savings Accounts | Discussion forum

There are 3 statements made by the CRA on the reference page:

The maximum amount that you can contribute to your TFSA is limited by your TFSA contribution room.

All TFSA contributions made during the year, including the replacement or re-contribution of withdrawals made from a TFSA, will count against your contribution room.
Note

Qualifying transfers, exempt contributions and specified distributions are not considered in the calculation of contribution room.

My understanding has always been that the second and third statement are qualified by the first, meaning that only contributions that fit into the annual max set by the indexed table above determine the max, so that the "All... withdrawals" part is qualified by that, i.e. "...is limited by your TFSA contribution room."

Others claim that the gains withdrawn from a TFSA also contribute to increasing the contribution room beyond the cumulative max above by interpreting the "All...withdrawals" at face value with no other constraint.

Why do I hold to the first interpretation? In my experience, the CRA tends to favour interpretations that favour the government to limit the amount of tax exemption one can qualify for.

The example I used in the other thread is if you withdrew $80,000 (which includes gains), your max contribution would still be $75,500 (max cumulative amount if you qualify from the beginning of TFSAs in 2009).

I would need to see evidence to the contrary to prove that the CRA is not doing this and allowing even gains beyond the cumulative annual max contribution.

Does someone have direct knowledge of which is the correct interpretation?

RetirEd said
I've spoken to CRA about this a number of times when moving money to avoid transfer fees, and it seems confirmed (as of my last call about a year ago) that:

1. Your initial contribution room for a year is set by the legislated amount, plus any unused room from previous years.

2. Any deposits you make during the year reduce the remaining deposits permitted FOR THAT YEAR.

3. Your earnings in the TFSA do not reduce your future eligibility room.

4. Any withdrawals you make increase your contribution room FOR THE NEXT YEAR by that amount. You can't re-deposit the cash in the same year if you don't have more room.

5. If you for some reason have NOT maxed out your contribution room, and make a withdrawal, you CAN re-deposit in the SAME year the lesser of:

- the remaining deposit room (and you can deposit the rest in a LATER year if there's more than that without reducing that later year's new-contribution eligibility)

- the amount withdrawn (if you have sufficient deposit room to deposit it all)

Note that this means that you never lose the deposit room that withdrawn earnings represent. That is, if you have a total TFSA balance larger than the total all-year allowance since TFSAs were created, and you withdraw it all, you CAN re-deposit that larger balance. Just not in the same year.
RetirEd  

Thanks for all that info but that info is only clear in what it addresses BUT if you look carefully NONE of it addresses the scenario I am raising... it is ONLY implied and open to interpretation that the CRA has NOT directly addressed.

If you look at 4 & 5 you will see that they are in tension and leave room for interpretation.

Again, another way to try to make the question clearer, if you max out all your TFSA contribution room, then have some gains, then withdraw all your TFSA money, including the gains, will you be able to re-contribute ALL the money INCLUDING the gains?

Again, until I see de facto proof to the contrary, I believe the 1st line of the TFSA max contribution room is a hard constraint, meaning the max is STILL the cumulative annual limits set by the CRA.

Most people, including many at the CRA, only think of general terms. So any withdrawal will give you back that contribution room the following year. BUT few if any think of the extreme.

I'd love to be proven wrong because that would be really good news. I am just not confident based on my many past interactions with the CRA.

So, does anyone have any concrete information to validate the interpretation one way or the other, NOT simply by what a CRA agent interprets (they have been wrong many times in the past)?

If nothing else, I will likely be finding out the answer to this at end of this year, into the next, because we are maxed out on 2 TFSAs (my wife & me) and I believe will have to move them to greener pastures, so I will have the opportunity to test this out (at least that is what I think ATM).

file said
Personally I went back through my contribution room history in My Account and when I had to empty my TFSA stuff to pay off debt, the next year the contribution room exceeded what the maximum TFSA dollar limit (you're treating the added up TFSA dollar limits as a maximum TFSA contribution room) would have been at that time due to the profits in it.

I think ultimately though you'll just see when you do it.  

Now this could be an indication that my interpretation is incorrect. To be sure that people are understanding the nuance I am bringing up, let me ask...

Prior to when you emptied your TFSA, had you maxed out the CUMULATIVE max to that point, NOT the max for the individual year?
And the amount you pulled out, was it above this CUMULATIVE max (again not the max just for that given year)?
And were you then able to re-contribute over the CUMULATIVE max at that point in time (again, not just beyond the max for that given year)?

These are 3 VERY DISTINCT AND CRITICAL pieces of information.

Just to be clear, I am not denying that you do gain back contribution room. What I am trying to get to is whether gains can increase that room beyond the cumulative max?

file said
I had not maxed it out, it was not above the cumulative limit, I have not contributed past that amount as of yet. I have a ton of contribution room remaining at this point which I'm working to use.

Here's my contribution room from 2012:

TFSA contribution room on January 1st, 2011:
$13,500.00

Minus contributions made in 2011:
$2,400.00

Unused TFSA contribution room at the end of 2011:
$11,100.00

Plus withdrawals made in 2011:
$4,114.59

Plus TFSA dollar limit for 2012:
$5,000.00

Subtotal of withdrawals plus TFSA dollar limit:
$9,114.59

TFSA contribution room on January 1st, 2012: $20,214.59

Using the annual dollar limits my contribution room for 2012, if following your "the maximum is the added up annual dollar limits", would have been $20,000.00 and it was slightly above that due to the withdrawal.  

OK, this is useful information. Let me ask some clarifying questions:

Was the Jan 1, 2012 contribution room calculated by you or provided to you by the CRA?

If you qualified for full TFSA contribution room, not sure why your limit was only $13,500 in 2011. It should have been $15,000, as that limit is not dependent on anything else, unless you overcontributed the year before. Nevertheless, it does not seem to impact the net outcome of your example.

@file thanks for confirming. So it does seem that ALL withdrawals increase the MAX contribution limit for the following year... so that even gains that are withdrawn can be put back in, over and above the set cumulative max.

That is great news. That gives me confidence to withdraw the full amount and personally transfer it to another FI without losing anything.

Thanks for helping.

Like I said, I will likely get the chance to try this this year end.