I’ve been reading a couple of articles lately about TFSA over-contribution penalties which are being levied against some Canadians by the CRA. These penalties have resulted from people over-contributing to their TFSA (Tax Free Savings Account). It appears there are two main causes for these over-contributions, which will be discussed here.
[update June 17]
Rob Carrick wrote an article on the Globe with quotes from a CRA spokesperson who appears to be saying that the TFSA contributions will be forgiven, if the error is genuine
In practice, CRA is saying that relief may be available for people who mistakenly overcontributed to a TFSA.
“Because we are reviewing each and every [situation] on a case-by-case basis, it’s correct to say that relief may be provided,” CRA spokeswoman Caitlin Workman said Wednesday. “Each case will be looked at with the facts at hand, so I’m a little wary of issuing a blanket statement. If it was truly an error – that’s what we tend to look at.”
[end of update]
Here is a TFSA rules refresher which contains all the pertinent rules.
What is the rule for TFSA contribution limits?
- Every Canadian who is 18 years of age or older, gets $5,000 of contribution room per year for the years 2009 to 2012 and $5,500 for year 2013 and beyond.
- If you make a contribution, then the amount of available contribution room is reduced by the amount of the contribution.
- If you make a withdrawal, then that withdrawal amount will be added to your available contribution room, starting January 1 of the following calendar year.
What is the TFSA over-contribution penalty?
The TFSA over-contribution penalty is 1% per month, levied on the amount of excess TFSA contributions. If you have over-contributed to your TFSA by $1,000, then the penalty will be $10 per month until you have removed the excess amount, or more contribution room becomes available.
TFSA over-contribution penalty because of lack of knowledge of TFSA rules
It appears, that some Canadians have inadvertently created an over-contribution to their TFSA, because they didn’t know that withdrawals from a TFSA account only get added to their available contribution room on January 1 of the next calendar year. If you contributed $5,000 to your TFSA account in 2009, withdrew money in 2009, and then contributed more money to your TFSA in 2009, then you will be over the contribution limit.
If you are in this group, then I suggest you pay the penalty, remove the excess contribution if it still exists, and learn the rules better, so it doesn’t happen again. The government was very clear about this withdrawal rule when the TFSA was introduced, and I think it is the responsibility of the individual investor to know the rules. The TFSA is by far and away the simplest investing account available to Canadians, so getting tripped up by the one rule which is even remotely complicated, is not reason enough to expect relief from the government.
- To pay the TFSA over-contribution penalty – Fill out CRA form RC 243 by June 30, 2010 (or the year after you are assessed the penalty).
- To remove excess amounts from your TFSA account – Contact your financial institution and ask them to withdraw the amount of over-contribution.
If you wish to complain about this penalty, then write a letter to Jim Flaherty.
If you still want to try to get relief from this penalty, despite my stern lecture then I’ll suggest the following:
- Appeal to the CRA – Plead ignorance, poverty, drunkenness – whatever it takes. They might give you a break.
- If you contributed more than $5,000 to any one financial institution in 2009, then send them the tax bill and demand they pay it. Tell them that since it is their job to know the rules, they should have known that you were over-contributing for that year and should have warned you.
- If you have a financial adviser and still got nailed with this penalty, then send the adviser the bill. If they were in charge of all your TFSA transactions then they are definitely responsible.
TFSA over-contribution penalty because of incorrect reporting of institutional transfer to the CRA
Another situation, is someone who did a transfer of their TFSA from one financial institution to another, didn’t contribute more than $5,000 in 2009, and still received a notice of over-contribution from the CRA. In this case, because you were transferring the TFSA money, there is no contribution or withdrawal. The TFSA money should just move from one institution to another one, without any withdrawal or contribution taking place. This move is allowed and is called a qualifying transfer.
If you withdrew the money, had the cash in your bank account and then “transferred” it to a new financial institution then you completed a withdrawal and contribution – not a transfer.
It is possible however, that one or both of the financial institutions you had the TFSA at, incorrectly reported the transfer as a contribution or a withdrawal.
For example if you transferred your RBC TFSA to an ING TFSA, then if there was an error made, RBC might have reported the transfer-out as a withdrawal, and ING might have reported the transfer-in as a contribution.
To fix this situation
- Contact the financial institutions involved with your TFSA transfer and ask if the transfer was incorrectly reported as a contribution or withdrawal.
- If the answer from #1 is yes – then ask the financial institution to fix the transaction so it is a transfer, and then ask them to file an amendment with the CRA. Once this amendment is accepted by the CRA, then your over-contribution should disappear.
- If the answer is no – then call the CRA and try to clarify with them how they are determining you are over-contributed.
Over-contribution penalty is still being charged after withdrawal of excess amount
Michael James mentions yet another situation (see link at bottom of page where a person had over-contributed to their TFSA, fixed the problem by withdrawing the excess amount and yet was charged an over-contribution penalty for the remainder of the year. In fact the penalty should have only been applied for the time period when they were over the contribution amount.
The CRA is in charge of adding up all your TFSA transactions in your various TFSA accounts and determining if you are staying within the rules. The CRA relies on the reporting from the financial institutions to collect this data.
In this case, that person needs to contact their financial institution to verify that all their withdrawals were reported properly. If for some reason, a person’s “removal of excess” withdrawal (which in fact, is just a regular withdrawal) was not reported to the CRA, then the CRA would think the person was continuing to be over-contributed.
To fix this situation
- Contact the financial institution(s) that hold your TFSA and verify all your transactions with them. They need to be able to tell you if any transaction was reported as a withdrawal or a contribution.
- If you determine that the financial institution made an error, ask the financial institution to fix the transaction, and then ask them to file an amendment with the CRA. Once this amendment is accepted by the CRA, then your over-contribution should disappear.
- If your financial institution appears to have reported your transactions correctly to the CRA, then call the CRA and try to clarify with them how they are determining you are over-contributed.
TFSA transfer to new financial institutions are expensive. To avoid transfer fees, please read TFSA Institutional Transfer Strategies.
The cheapest TFSA is available at Questrade Discount Brokerage. No annual accounts fee and $5 trades.
Other articles about TFSA over-contribution penalties
TFSA Over Contributions at the Canadian Tax Resource blog.
Taxpayers hit with penalties at the Toronto Star – written by Ellen Roseman.
TFSA Over-Contributions May Be Over-Penalized at Michael James on Money.
TFSA Excess Contribution Penalties Ensare Taxpayers at the Canadian Capitalist.
Qualifying Transfer definition at the CRA. This explains that transfers of TFSA money between financial institutions will not affect your contribution or withdrawal amounts for the year.
Want to learn more about RESPs? Buy The Book:
The RESP Book: The Simple Guide to Registered Education Savings Plans
Everything you need to know about RESPs.