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.
- 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.
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That’s a good practical guide for dealing with the TFSA over-contribution problem. The possibility of a misreporting of a legitimate transfer is something I hadn’t considered.
That’s just another reason to like ING. I have my TFSA with them. I put in about $4,000 and then took out about 1500 a few months later. When I’d put in another $1000 and went to put in more, it would not let me, saying I’d maxed out my contribution. I couldn’t figure it out because the balance wasn’t $5000. So I called and they explained this to me. If the bank hadn’t stopped me from doing it, I’d be paying the penalty too.
What about the folks who (oy) withdrew and deposited multiple times, ending up with an overcontribution penalty based on $25,000 ? I would hope the CRA can waive that down and make sure it’s all cleared up.
@Michael – thanks.
@Nadine – that is something that all the financial companies should have done. However, if someone was making various contributions with different companies, then there would be no way for anyone to know – other than the contributor.
@Charles – Michael James has talked about the situation where people have done multiple withdrawals and contributions – never going over $5k in their TFSA but getting nailed big-time on over-contribution. They should have learned the rules better, but I wouldn’t be surprised if the gov’t offered some relief.
Nice Post:
Can you please explain what is Section 207.06 of the income tax act? and why did the CRA lady tell someone to quote it in her letter of appeal?
Looks messy
@Curious – thanks.
I’m not familiar with section 207.06 – according to http://www.taxtips.ca/tfsa/taxespayable.htm
it says:
“Waiver of tax payable
Income Tax Act s. 207.06
The Minister of National Revenue may waive or cancel all or part of the tax payable regarding excess amounts or non-resident contributions if
bullet
the liability arose as a consequence of a reasonable error; and
bullet
the individual rectifies the situation without delay, by transferring out the excess amount or non-resident contribution.”
I guess the idea is that if you are trying to get the CRA to waive the fee, that section might help you, if you assume that ignorance of the rules is a reasonable defence.
I sincerely hope that you have to pay a $600 penalty some day for a little misunderstanding, then we will love to hear your lecturing.
@Matt – If it happens to me, then I will be ranting – not lecturing.
Why do people not accept responsibility for their own actions? The government is to blame! The banks are to blame! My financial planner is to blame! Never it’s my fault. Every person that over contributed did not learn the facts about the programme as offered. If someone received an over contribution because a transfer was reported incorrectly, that can be corrected.
General Motors sold me my car. They didn’t tell me that I have to drive on the righthand side of the road. Even though their vechicles go faster than 100 km/h, they didn’t tell me that the speed limit on the 401 is that. By the logic put foward in some the commemts above, GM should pay for any ticket/fine I receive if they don’t explain the Highway Traffic Act to me OR if they allow any of their vechicles to exceed the maximum speed.
Learn the rules people, there’s no-one to blame but yourself.
I got one of those penalties to pay by June 30th! Mike, you are right, it’s 1% of the overall balance :0(. I left my excess in contribution not only for a month. My mistake was about the withdraw, the amount you withdraw can be reinvested yes, but only on the next year… I had account at 2 places for my TFSA, so no one is responsible for my mistake than myself and no one knew I was going a mistake… And this mistake is costing me 75$… Great thing I have a bit of money on the side! I learn my lesson, Withdraw = contribution for the year after ONLY!!! Can’t believe still this mistake iscosting me 75$. I just really hate myself for this mistake. Just when everything is going well, have money to invest…….. and there you go, something happen. You know, really sad. And should no one be too rude about saying stuff like no one to blame but yourself kind of thing to anyone. That kind of stuff really HURT!!!
@Sunny – You need to get a hold of yourself – it was an honest mistake and it’s only $75. Don’t beat yourself up over it.
“Officer, I had no idea I was not allowed to drive 60 km/h in the school zone”.
Sucks, but an assumption that the account was just a ‘regular savings account’ should not have been made. If I over contributed to my RRSP last year, should I get the same sympathy?
Yes you should Sampson. This is a new product and people are just learning how to use it. People don’t always read the fine print.
One day I may also have the problem of over contributing to my investments. That is a day I look forward to with great relish.
Rachelle, I’m not a completely cold-hearted jerk, however, my point is only that people SHOULD read all the fine print and be expected to do so.
I can understand if the financial institutions and ‘investment advisors’ at big banks have wrongly given advice regarding withdrawals leading to some people taking money out of one institution and putting it into another. I’d be mighty upset too. However, to suggest this is the government’s fault and that people deserve a free pass, that I don’t agree with. Also, this type of mistake is an issue with the financial institution, not the government.
I’ve read some comments where people feel duped by the government, or that the government made the rules obscure and opaque. Even if they are, the onus is in the hands of the individual.
Thanks for the mention Mike. While I have sympathy for taxpayers on hook for excess TFSA penalties, as I said in my post, I don’t think there should be a blanket waiver. It looks like many financial institutions failed to warn TFSA account holders that they may be over contributing. This is a matter between the client and her bank. I don’t see why the Government should waive everyone their penalties.
*Canadian Capitalist*
While I agree ignorance should not be an excuse, the penalties are excessive, and thus should be waived. If person X never actually had more than $5000 in the account, be withdrew and re-deposited numerous times therefore accruing a virtual over-contribution of say $25,000 (and a $250 penalty). Is this just? This is the same penalty for over contributing an RRSP; 1) without the $2000 grace amount AND 2) the fact that the RRSP funds are tax free. These TSFA’s were supposed to be a vessel for Canadians to save their money and not have to pay tax on the proceeds. If the proceeds never went above the $5000 threshold why should be expected to pay such a ludicrous penalty? It’s an unjust penalty for most people that genuinely didn’t realize that “hey, I don’t have more than $5000 in my account, I’ve stuck to the limit so I should be fine”. They should have called it a “one-time TAX FREE SAVINGS DEPOSIT”.
I just talked to a CRA employee by phone. My bank said I’m O.K. now for next year because I paid the 2009 fine for the “re-contribution ” fine BUT this girl from CRA said they misimformed me again and it is NOT O.K. NOW for 2010 I am going to get ANOTHER fine for the time from January till June (but they are “not aware of my situation yet until the bank notifies them at the end of the tax year that I have yet again an over contribution for 2010.I am in financial difficulty because my employer went to Mexico for a better bottom line and left a 39 year employee with nothing. I tried the TFSA to save up money for a new furnace.My bank did NOT supply a brochure.They weren’t available yet and they did not mention anything about penalties when I withdrew the money for the furnace OR when I “RE-contributed it. After talking to the bank again today, they still insist “It’s O.K.”I hope the minister responsible for this situation can rectify it soon. -Peter.
How to send the request for the waiver?
1. T400A with a cheque
2. T400A without a cheque
3. A letter with the cheque
4. A letter without a check
And who we should send the request to?
I sent a T400A to my CRA Tax Centre (Winnipeg for my area) without a cheque. I guess now I wait and see if I get another little envelope with a bill plus interest on top of my $300 penalty.
Great information.
I know many people in the banking world, and know that there are times when the banks are compensating clients for the penalty. It seems to mostly be when all the contributions were done at the same bank and the client was not properly advised of the rules when making the contributions. Keep in mind that everyone would have signed agreeing to the terms and conditions, and that somewhere in that fine print is says that it is the clients sole responsibility to know their contribution limits, but if you feel the bank had a reasonable opportunity to provide you advice, which would have avoided the penalty, and they did not you might be able to get refunded.
I called CRA and explainead my” RE-contribution” situation and was advissed that “yes, I will be penalized again in 2010 tax year if I don’t 1. take the offending amount out of the “Tax-free” acount
2> have the bank send an electronic amendment to the CRA of the amounts still effecting the 2010 tax year
My financial advisor at the bank insists that I am “O.K. and they won”t penalize the 2010 tax figures.I have already paid the 2009 tax fine and I expect if the CRA is not notified that I : 1. withdrew the offending amount out of the TFSA and 2. asked the bank to notify them BEFORE the end of this year, they will once again charge me a penalty for these “RE-contributions” for the whole year of 2010.I tried to down-load the Hardship Relief Form 9465 but no success yet.This article may help people recover their investment money if they can obtain it. -Peter
“The TFSA is by far and away the simplest investing account available to Canadians”
Is everyone ready for this ? This is what we SHOULD have done instead of this convoluted and dangerous account …
The first 500$ of interest earned is tax free, no special accounts, no special form, you simply have to declare interest earned above 500$. Each year, that can go up by a fixed rate tied closely to inflation. Voila, all problems solved, all problems avoided.
@Jay from Ottawa: I agree that something like some tax-free interest is much simpler. In fact, this used to exist in the tax system a long time ago. However, it’s too easy for another government to come in and eliminate this tax break. Introducing TFSAs is much harder for another government to take away. Another thing to consider is that over time some people will be able to save large amounts in TFSAs and will get much more than $500 interest tax free each year. We’ve had some teething problems with TFSAs, but they are likely to have more permanence than a simple tax break and have the potential to create much larger savings.
(6th time trying) Same dealings with bank and CRS . Only class action law suit will bring any results. Multiple explainations and rules from each only reveals the magnitude of what has been allowed to happen. -Peter.
(6th time trying) Same dealings with bank and CRS . Only class action law suit will bring any results. Multiple explainations and rules from each only reveals the magnitude of what has been allowed to happen. -Peter.(Each letter different)Each contribution a responsibility to express the sereousness of the situation, for people who may not have all of the resources etc. that we do. People, speak-up for yourselves conserning this very important issue. I will raise this with my local gov. now also. -Peter.
It should be understood that there are serious flaws in the TFSA government program, which do not really seem to be discussed by the various “financial gurus” – who just like the banks, are not typically in the business of helping people, but rather of helping themselves.
Fair enough.
The role of government however is to protect the population.
The unfortunate reality however is that governments and their individual actors appear to be blatantly in the business of helping themselves.
With the banks, financial gurus and governments in bed together, we end up with summits and impotent conclusions such as those reached at the G20 in Toronto.
“Cutting deficits will solve the impending collapse of the world monetary system”
“The TFSA is by far and away the simplest investing account available to Canadians”
Complete hogwosh.
Creating viable economies actually has very little to do with money and monetary policy.
Funny/sad how people are incapable of thinking.
Rather sad, how many are capable of thinking only in terms of hogwash and narrow self interest ..
ummm. I do not agree with this article at all. The banks and the government is responsible for introducing a fairly new savings account without clear cut rules for the bank to follow and banks for misinforming the public saying that it is like a normal savings account.
Hey everyone, and first of all when I received my mail I thought hey my HST rebate arrived. NOPE, JUST MORE TAXES. “YAY”. So I called CRA to find out more and argue my case. The CRA telephone operator could barely speak English and told me that I have to treat my TFSA account like income tax. But then I said then how come it is called a Tax-free “SAVINGS” account and you get it with a bank not the CRA. She had no comment and kept repeating the same BS saying that I over contributed. Funny that when I was transferred to a live operator, they even told me there was a Separate department that deals with this, which is outrageous. However, I do agree with the earlier posters stating that PC financial does a great job of advertising falsely. For everyone, who did not hear or find out about this new announcement; you have until August 3, 2010 now to file your letter/ form. here is the link
http://www.cra-arc.gc.ca/whtsnw/tms/jntsttmnt-eng.html
Also, if anyone starts a class action lawsuit against the banks and CRA. you can count me in.