Withdrawing US Cash from TFSA

Throughout 2019, I withdrew the US cash dividends generated from my shares of Algonquin Power (AQN.T) that I held in my Tax Free Savings Account (TFSA) and moved the cash directly to my US bank account without incurring currency exchange fees.  Since the money came out of the TFSA, there was also no income tax generated.  This seemed like an excellent way to accumulate more US cash that I could use to spend on vacation in the States.   It was also an easy transaction to trigger since I could make the request on my own from my online account on the website of my discount broker Scotia ITrade (as opposed to lengthy waits on the phone to request an agent to do it for me!).

It was unclear how the withdrawal of US cash would affect my TFSA contribution limit for the following year, which is calculated in Canadian dollars.  I assumed that each of my withdrawals (approximately $195USD and $254USD) would be converted to Canadian dollars based on the exchange rate at the time of the withdrawal, and that amount would be added to my contribution limit.  I would not know for sure what exchange rate was used until I received notice of my new contribution limit in 2020.  I was also not entirely sure that I would not need to re-contribute the withdrawal in US funds, but that seemed unlikely.

Because the Canadian Revenue Agency (CRA) does not receive all the information regarding contributions and withdrawals from a TFSA account for a given year until the start of the next year, it does not update your contribution limit until end of January or beginning of February of that new year.  Even though I had made my 2019 TFSA contribution of $6000 in January 2019, and made withdrawals in April and October, none of these transactions were recognized on my CRA account until January 26, 2020.  It is important to understand this and not take at face value what the CRA account says that your contribution limit is during the year or else you may be led to mistakenly over-contribute.

When I finally did receive details on my 2020 contribution limit, it was as I assumed it would be.  Each of my USD withdrawals was converted to Canadian dollars at the given exchange rate at the time of withdrawal, and these Canadian values were added back to my contribution limit.  So this finishes my experiment of removing dividends in US dollars from my TFSA and replacing the equivalent value the following year in Canadian dollars, all without incurring any fees or taxes.  This is a strategy that I will continue to employ in the future.  Note though that the Algonquin Power stock that I hold in my TFSA is a Canadian stock, even though it pays its dividends in US dollars.  I do not hold US stocks in my TFSA since (unlike for the RRSP/RRIF) the IRS would take 15% withholding tax on dividends generated in this type of account.