Is Money Taken Out of a TFSA Taxable?

In case individuals ask the question, “Do I pay tax on my TFSA withdrawals?”—it is very natural. Canadians may be drawn to the TFSA for its tax-free status.Yet, it is important to understand how this rule applies when taking money out.

The Straight Answer

In Canada, money withdrawn from a TFSA is simply not taxed. No matter if the funds are from the contributions or the earnings inside—interest or dividends as well as capital gains—they can all be withdrawn without a tax hit.

That said, this benefit comes with one catch: timing the next contribution. Here is where many TFSA holders get caught off guard.

What to Watch Out For

It is true that withdrawals are tax-free. But the decision to put the money back in can generate penalty payments if one is careless. The CRA tracks the annual contribution limit, and early re-contributions may result in a TFSA over-contribution penalty. Within this aspect, we present major facts as below:

• Withdrawals themselves are not taxed—no matter the source.
• Re-contributions in the same year can result in a 1% monthly penalty if the limit is exceeded.
• Wait until January 1 of the next year to re-contribute the amount you took out unless you are sure you have extra room.
• The IRS doesn’t recognize the TFSA—so if you are a U.S. resident or citizen, you may need to manage IRS TFSA taxation.

A Note for Cross-Border Investors

If U.S. dividend stocks are held in your TFSA, you will not pay Canadian tax on the dividends. Yet the U.S. government imposes a 15% withholding tax. Unfortunately, you can’t claim this back through a foreign tax credit. Within this context, preferring assets carefully is part of smart TFSA tax strategies.

Final Thoughts

So, is money taken out of a TFSA taxable? Not in Canada. But the next move—no matter if it is re-contributing or investing in U.S. stocks—can establish a distinction. If you need any assistance with TFSA, contact Watter CPA today for financial clarity.