The new investment instrument for Canadians is the tax free savings account or TFSA. Over time the contribution room will grow (loosely by 5000 + inflation per year). Depending on the type of agreement that you have for your TFSA, you can generally withdraw any amount from the TFSA at any time and for any reason, with no tax consequence.The withdrawals will also not affect your eligibility for federal income-tested benefits and credits.

BUT, you need to remember this crucial aspect when withdrawing:


Withdrawals, excluding qualifying transfers, made from your TFSA in the year will be added back to your TFSA contribution room at the beginning of the following year.

You cannot contribute more than your TFSA contribution room in a given year, even if you make withdrawals from the account during the year. If you do so, you will be subject to a tax of 1% of the highest amount in the month, for each month you are in an overcontribution position.

Example
In 2009 you invests $5,000 in a TFSA. Later that same year you withdraw $3,000. However, turns out you don’t need the money, or you get your 3K back. You DO NOT have unused TFSA contribution room left, thus you would have to wait until the beginning of 2010 to deposit the $3,000 in your TFSA (plus another 5000). Before 2010 you will overcontribute to your TFSA and will be charged a monthly tax of 1% on the overcontributed amount.

You don’t need to report any contributions or withdrawals you made during the year on your individual tax return.

So remember withdraw, the room is still there, however, you can’t replace within the same year period.

[tags]tfsa[/tags]