If you have contributed too much to your TFSA, you will be required to complete a tax form to calculate how much penalty tax you will have to pay. You might want to take a look at how to calculate the TFSA contribution room before reading the rest of this article.
Calculate Your Excess TFSA Contribution
The CRA refers to the over contribution as an excess TFSA amount. The excess TFSA amount is calculated as:
The total contributions made to all of your TFSA’s (except qualified transfers or exempt contributions)
- Less: The unused TFSA contribution room at the end of the prior calendar year;
- Less: The total of all withdrawals made in the prior calendar year (other than a qualifying transfers);
- Less: The TFSA dollar limit for the calendar year;
- Less: The total of all withdrawals made from all TFSA’s this year (other than a qualifying transfer or withdrawals that are more than the excess TFSA amount)
The TFSA Penalty tax
If you did have an excess TFSA amount, you will have to pay a 1% penalty tax for each month you were in an over contribution position. Unlike RRSP’s that use the value at the end of the month, the TFSA excess amount is based on the highest amount in your TFSA during the month.
Note: The excess amount is based on contributions and is not based on the change in value.
Assume you contributed $5,000 you your TFSA in January and it has grown to $6,000. Then in June, you contribute another $4,000. Your penalty tax will be $40 (1% of the $4,000).
You Have To File A TFSA Return
If you have an excess TFSA amount, then you have to file a Tax-Free Savings Account return (RC243) to calculate the penalty tax. The due date for this form is June 30, 2010.
Penalty Tax Also Applies If…
The 1% per month penalty tax also applies to your TFSA if you were a non-resident and made a contribution to a TFSA or if you held non-qualified investments in your TFSA.
Final Note
The Canada Revenue Agency has the power to waive the penalty tax if you can prove that you made a reasonable mistake and took steps to fix the situation. If you’re not sure, there is no harm in asking.
Questions
Do you have questions or want to comment on about TFSA Contributions? Please feel free to leave a comment.
Related Articles
- Letter To Jim Flaherty TFSA Overcontribution Penalties
- The Foreign Tax Credit
- What Investments Can I Hold in My RRSP, RRIF, TFSA or RESP?
{ 4 trackbacks }
{ 233 comments… read them below or add one }
← Previous Comments
It seems like PC Financial is a big culprit here. What’s the deal with this bank??? They were the rudest to deal with.
I transferred $5000 from ING to PC within 5 days of depositing my TFSA in Jan, 2009. I’m now getting dinged for $600. RIDICULOUS! I can’t even believe that the CRA is charging 1% on $5000 that doesn’t exist. How is this even legal?
I think a class action lawsuit is in order. It’s time to play US politics with this situation since no one is obviously listening…
I am very upset that my husband accidentally over contributed in February when he topped the TFSA account to its original 5000 dollars. The irony of this, is that he only had the money out for’ one week’ and now we are being penalized one percent for the next eleven mos. Ellen Roseman in the Toronto Star was absolutely right when she wrote ‘It would be nice to see Ottawa do a public education campaign and waive penalties for over-contributions made in error during the first year.” Unfortunately I won’t hold my breath…in my opinion pay back time will be in the next election if the government resorts to such ‘ruthless practices’ as this one.
Hello,
My name is Andrea MacLean. I’m from CTV News Calgary.
We’re looking into this story and would like to speak to someone from Calgary tomorrow (June 23/10) who has facing penalties from the CRA for over contributing or for a mistake made while transferring money from one account to another.
Please feel free to call me if you are from Calgary and have been affected.
403-2405649
lots of publicity re investing $5000 in a TFSA but little to warn buyers beware of pitfalls associated with . As a senior I particularly resent this approach. Feel the government should waive these penalties and present a more honest consumers aware program. I am sure the government is gloating over the $$$$$$$in its coffers. Shame on you our “elected” voice!!!!
I am wondering if those excess amounts in 2009 that we were penalized will be carried over to 2010?
Say, I contributed $8000 (due to several transitions of deposits and withdrawals) to my TFSA accounts last year and penalized on the excess amount of $3000. Then will my limit for this year be $5000 or $2000? Should I immediately withdraw the excess amount of $3000 from last year?
This is so confusing!!
Any help?? Thank you in advance!
Hi Jinny,
Your limit for this year would be $2,000 and the penalty would have stopped effective Jan 1, 2010.
Actually, your limit would be $2000 assuming you actually contributed a net of $8000. By “net” I mean all deposits minus withdrawals.
If you contributed $8000 through a series of deposits and withdrew $3000 through a series of withdrawals then your net would only be $5000. Your contribution room for 2010 would be $5000 but you would be penalized on the $3000 over contribution.
Another example – suppose through your series of contributions and withdrawals you actually contributed $8000 and withdrew $4000. Your net would be $4000. Your contribution room would be $5000 + $1000 = $6000. But you would still pay a penalty on the $3000.
Now, here is where it gets confusing:
Suppose you recognized you had made deposits of $8000 into your TFSA and any amount of withdrawals (it doesn’t matter for this example). You recognize you are going to be slapped with a penalty so you withdraw $3000 so you won’t be having to pay the penalty for the remainder of the year. You must inform your bank that this isn’t an ordinary withdrawal but a withdrawal to remove excess contributions. if you fail to notify the bank that this is a withdrawal due to excess contributions then even though you withdrew the funds, you will be penalized for the $3000 as if it had never been withdrawn. You have to make the distinction between a regular withdrawal and a withdrawal due to excess funds.
If I haven’t confused you enough, yet, then here is the kicker:
suppose through a series of contributions and withdrawals you contributed $8000 and withdrew $8000. This leaves you with zero dollars in your TFSA. Unless you have clarified your withdrawals you will be assessed with a $3000 penalty even though you have zero dollars in the account. Your contribution room, however, will be $5000 + $5000 = $10000 for next year. So you pay a penalty for a $3000 over contribution on a TFSA that has zero dollars and you’ll be able to contribute $10000 next year.
I got suckered by TFSA as well. Feel like such a victim by govt. I am also with PC Financial with no warning of any sort of penalty. Since this is the first year TFSA is being offered, there wasn’t much awareness made to consumers. This is really ridiculous on behalf of the goverment and banks. I don’t even know how to pay this as I only see the option to pay by post which will take forever and will definitely miss end of month deadline. Suckered once again… Down 260$
… glad i’m not the only one…
I withdrew $1050.00 from Scotiabank TFSA on August 17/09 & deposited in my Canadian Tire TFSA on August 24/09. It was simply a transfer due to better interest rates. At no time did I exceed my $5000.00 deposit level for 2009.. The deal was promoted over RRSP in that you could withdraw money & replace it again. Only now do we find out we are heavily penalised. Not a very good job in promoting the deal. I am 85 yeaes opf age ,a veteran, have been active in Rotary , a member of council & am surprised at how little thought was given to this promotion. I might be old in years but I am NOT senile!
Hi Andrea,
I am from Calgary.
I will be hit with a penalty when 2010 income taxes are filed. I am being proactive about this and trying to get it rectified. It’s been quite an involved process, to date. I contacted my bank informing them that the transfer I did with my TFSA was not a “qualifying transfer” as set out by the rules of the TFSA and was actually a withdrawal and a subsequent contribution. Even though both accounts were with the same institution. The bank told me to contact the CRA, directly, and explain the situation.
In the meantime I also contacted our Department of Finance about this matter and they were adamant that they don’t get involved in taxes directly and that the Canadian Revenue Agency handles that. Fair enough, but when I told them the issue isn’t with the CRA which simply enforces the policies mandated to them by our Department of Finance they weren’t clueing into that message and referred me and my line of inquiry to the CRA (who is bound by the mandate given them by the Department of Finance). This isn’t a chicken and egg scenario. I absolutely know which came first.
Anyway, the CRA was helpful from the point-of-view that they indicated they cannot pursue matters proactively and can only make decisions based on tax records they already have. They directed me to contact my bank, again, and have them draft a letter explaining the situation that I can then file with my 2010 Income Taxes. No guarantee I still won’t be levied a penalty since there is no guarantee they will actually read the letter attached with my filing. So I must keep the letter with me and use it as a document for when I am assessed for a penalty and need to appeal it. So much for being proactive about this.
Currently, I am working with my bank to get this letter drafted. Right now, it looks like there may be mechanisms in place to have my wihdrawal and subsequent contribution re-classified as a qualifying withdrawal. If it turns out the mechanics are in place to do this, then hopefully the mechanics are in place with the banks to be able to do qualifying withdrawals in the first place (since it seems, from my experience, the mechanics were not in place for them to be able to do this earlier in the year).
I will give you a call.
I opened a $5,000 tax free account in one bank then transferred the funds to another Bank the next day. The $5,000 was transferred from within 24 hours.
Now I received a notice from TFSA penalizing me $500 for transferring the tax free money from bank to bank. They say I opened two accounts in the same year which is subject to penalizing.
I fail to understand a Government that encourages Savings Accounts then penalizes for transferring the allowable tax free amount.
Does anyone know how a person can dispute these penalties?
Hey,
First I just wanted to say thanks for the great blog and you work, keep it up !
I have a question about Excess TFSA Contribution. I understood from the article that to complain about this one needs to file the RC243 SCH-A form. But this form only re-states the calculation. In my case I actually made the mistake of putting in 5K then taking it out shortly after and then in November putting in another 5K resulting in my having to pay interest on the 5K for two month.
I called the tax man and they suggested to fill out form T400A – “[you] can use this form to file an objection to a notice of assessment or a notice of determination issued under the Income Tax Act.”
Is this form right for this purpose ? Has anyone else had another way of trying to “prove that you made a reasonable mistake” ?
Thanks,
Roman
Hi Roman,
Many others made the same mistake. The penalty is what it is and sadly, you over contributed. The best you can do is object and ask for them to waive the penalty.
Mr Jim Flaherty
I got a penalty of 5400.00, I did not know any about the limits and penalties, it was the money of selling my house, I did with an PC financial, no offices, I was not warned until Scotia Bank did it 3 months later when they offered me the same service, when I taked today with PC Financial they said I should read the documents, dividends I got was around 600.00, this is completely unfair to pay this money, it was an honest error, I tried to correct it 3 months later with Scotia Bank adviced me.
I have contacted PC Financial, I told them I was not warned, you should read all the documents is their only response. I am saving 12.00cdn per month with PCFinancial, but in this case I have to pay 5400.00 that could be avoided if I could have a Financial advisor infront of me, besides the long waiting times to talk with an Agent, to ask permission to use my money when I need it.
I am on the step to fax to Ombusman at CIBC my story, I hope to find a better support than: Talk to us, and Customer Care Center, last step is Ombudsman@obsi.ca.
I was also this morning at CRA office, nothing can be done, is the Law, they suggested me to send my payment and a request for Taxpayer relief(form RC4288 E).
I know this rule is the Law, Tax Law, but all the Laws has a groundings, mainly to protect the society, or to avoid something, I am very sure if we were properly ontime adviced or educated in this TFSA tax this should not happened, who wants to pay this quite high penalties, so what’s the reasson for the penalty?
The following information was just posted on the CRA website
at
http://www.cra-arc.gc.ca/whtsnw/tms/jntsttmnt-eng.html The Honourable Keith Ashfield, Minister of National Revenue, and theHonourable Jim Flaherty, Minister of Finance, issued the followingstatement today:
The following information was just posted on the CRA website at
http://www.cra-arc.gc.ca/whtsnw/tms/jntsttmnt-eng.html
The Honourable Keith Ashfield, Minister of National Revenue, and theHonourable Jim Flaherty, Minister of Finance, issued the followingstatement today:
Jim
thanks for the good news.
Kamran
I agree with you, Peter Jones, it’s another way to calm down angry people, but they are determined to collect these easy money
My net balance never exceed $5000, and I explained that very clearly on my letter to them, but they cached my cheque any way!
I’ll “suck up” this theft as they want, no other choice when the thief is much stronger than you and you have no means to fight back
But my vote will be for the Liberal any way, even if they reimbursed me this money later on which I doubt, but the hardship we endured is enough reason not only to never vote for the conservative but to do my best to lobby my family/friends against them.
And if any one know how to start a class action, I’m in, even if it’ll cost me a thousand dollar, I do not like weakness if I have any choice to fight back
I made the mistake of over contributing to my TFSA. I was treating it as if it were an ordinary saveing account, and used it for my brokerage account. I admit the mistake and recieved a bill from Revenus Canada for $120, which I paid. How do I get out of this mess? My accountant has never heard of this problem before. Here are my contributions. March 11/09 $5000.00 July 28/09$2000.00 Feb. 15/10 $6,015.00,
Feb. 22/10 $5000.00. I never recieved any advice or info on this account until I recieved this Invoice. Need help,
Jerry
feb. 22/10
$120.00 which I paid. How do I get out of this mess
This TFSA is a Big Sham.
Hi everyone.
Just a little info here. If you are sending a letter make sure it is addressed to “The Chief Of Appeals” and make sure you sign it.
and there are a few sticky rules about when you can the the appeal letter read more here http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/tfsa-celi/txtn/rpt-eng.html
← Previous Comments