On May 5, 2021, Michel contributed $6,000 to his TFSA in Bank “A” leaving him with a remaining TFSA contribution room of zero.

In July, he received his TFSA statement from Bank “A” which showed there was only a minimal growth ($25) from his investment. Michel decided to talk to other financial institutions to see if they could offer a better rate of return for his TFSA investment. Michel found a better rate offered at another financial institution and decided to transfer the funds from his TFSA account to Bank “B.”

For Michel’s TFSA contributions to be considered a qualifying transfer, with no tax consequences, Bank “A” must complete a direct transfer of funds to Bank “B.”

If, instead, Michel went into Bank “A” in July, and withdrew the amount in his TFSA and walked into Bank “B” to open a new TFSA with a contribution of $6,025, the contribution would be treated as an ordinary contribution and because his unused TFSA contribution room was already zero, he would have an excess TFSA amount of $6,025 and would have to pay a 1% per month tax on the excess TFSA amount for as long as the excess TFSA amount remained in his account. The withdrawal from Bank “A” would be added back to his contribution room at the beginning of 2022.

In addition, if Michel left his contribution to Bank “B” in his TFSA for the rest of the year, his tax would be calculated as follows:

• highest excess TFSA amount per month from July to December = $6,025
• tax of 1% per month on the highest excess TFSA amount is $361.50 (6,025 × 1% × 6 months).