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.
Related Articles
- Understanding TFSA Contribution Room
- Leaving Canada And TFSA Contributions
- TFSA Questions And Answers
- What The New TFSA Rules Prevent
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Everyone should complain. The squeaky wheel gets the oil.
If I would of known I’d get a bill for $688.83, on a capital gains from interest of actually under $90. It’s not as if I kept the money in and brought more money into the picture, I was transferring the same money back and forth to get the best rates. I learned of all this today, and immediately moved all my money from one of the TFSA into a regular account (will be fighting that next year if not this year, as well). I would much rather pay 10% on $100 yearly than 1% on $70,000 monthly. This makes no sense to me. They should be factoring in the interest accrued from these dealings.
Hello Brad,
This may sound a little crass and uncaring, but “ignorance of the law is no excuse!” However, is can be a mitigating factor that may be used as a partial defence. An error due to the result of ignorance or mistake may help your particular case.
I would suggest you make an application under the Taxpayer Relief Provisions. Although the relief provisions are normally reserved for extenuating circumstances and are not normally applied in cases such as this, it is certainly worth a try.
You should also consider contacting the Minister of National Revenue’s office directly and state your case. Based on the numerous complaints and questions on this topic, the government should know and be encouraged to be a little more lenient.
Same boat as you guys. I got a bill for $1200 today. When I got the account last January with the 2.5% introductory rate I couldn’t resist
. I assumed I would still pay tax on the interest accrued on the money over $5000. argh…. I finally did a little digging around in November and realized what was going on and immediatly withdrew enough to make it right. sigh…..
So frustrating…
Do not accept no for an answer when you phone them.
Ask to talk to the persons superviser. And if that person can’t help you ask to talk to their superviser. and so on and so on. They have us by the balls and they know it so they won’t just hand it back without a fight.
Contact your local MLA if you don’t get satifaction from CRA.
Maybe getting the media involved will help.
Maybe the banks should share a little responsibility. I applied online for my account and had it said in big red letters in the middle of the screen before I agreed to open my account that I would be subject to a 1% penalty by the CRA if overcontributed, Duh I wouldn’t have done it.
Jacob,
I mentioned to another visitor that a call or letter to the Minister of National Revenue may demonstrate mass confusion about the TFSA. He may direct the CRA to be a little more forgiving.
same here….i just got my letter today….
So, I get a letter saying my over contribution was over $40,000 and I owe them more than $400 in a penalty!?!? What is going on here? The limit was $5000 and the most my account was over was $2500 and that was for one month! I think I earned something like 10 dollars in interest with this scam account, and I’m supposed to pay a $400 fine for being over the limit by $2500 for one month!? My money is SO out of this government scam account.
Hello Chris,
Did you happen to deposit $5,000 to a TFSA, withdraw it and deposit it again? Repeating this process seven times would result in a $40k over-contribution. Like the others, you might want to call the CRA, your MP, and the Minister of National Revenue and even the Finance Minister to complain.
Tax guy,
The $40K seems to be the $5000 x 8 months. At least that’s what happened to me.
I also was misled by the initial publicity about the TFSA accounts. I interpreted the contribution room to be a maximum amount/limit of $5000 that could be held at any one time – not the maximum “contributions” per year – very confusing when you’re told that withdrawals are without penalty and that it can be used for “general saving”. I have received my penalty bill for $282 today – and am sure that my husband’s bill will be arriving tomorrow. I will definitely be phoning the CRA to explain and find out if they will waive it. I hope enough other people complain!
I had a $5000 TFSA in one bank, when I moved to another bank due to getting a mortgage, I moved my $5000 TFSA to that bank. Nobody at any bank told me this would mean a contribution of $5000 over the limit, In other words I am paying interest on $10,000 even though it was never more than $5000 that I had. I am outraged. The TFSA was advertised through the media by governments and financial institutions, but they do not know the rules nor do they explain them. I am going to complain to the Minister of National Revenue and the Finance Minister. I wrote an appeal to Revenue Canada today. I think this TFSA is going to make the cash grabbing government earn more money than if we had our money in a regular account. Also in the original account, I took money out and put it back in, as we do with savings accounts. Putting the money back in, meant I was going over the limit, because they base it on the original amount. Ridiculous!!!!
I got my letter today. I get into same situation now. I withdrawed $3000, then next month I saved it back. so I have to pay a $120 fine.
Ben,
It’s not a “fine” per se. It’s a penalty tax. I know it’s semantics, but a fine is a little different.
My husband and I have $550 penalty in total. I almost had a heart attack last night when I opened the letter. Has any one successfully have CRA waived the crazy fees? What to do ?
Please help. Thanks.
I got my bill yesterday for $263, it will be more for the upcoming tax year – probably about $500. I rushed to the bank today to take out all of my TFSA contributions so I wont be penalized in upcoming future months. I called the CRA they said to mail in a letter to appeal. The banks took no responsibility.
I was first suckered in to the account online. It seemed like any other savings accounts I used. Where you could deposit and withdraw money. I made sure the amount never got over $5000. I still got charged because they don’t take withdrawals into account! Sheesh.. I wish I had known this. My money was sitting in a savings account. I made a few dollars on it, and end up paying a few hundred. I hope my appeal works, this is very upsetting
Did they tell you that they will waive your fees on the phone? Or did they just say that you have the option of submitting an appeal and hope it will then be waived? The form asks us to fill out something if the amount of tax penalty is wrong.. is this the appeal you are referring to? This is my first time encountering something like this.. I’m still a student without a job and they are asking me for $1200 by the end of this month, if not they will add on interest. I think this is downright wrong. It’s as if they’re stealing candy from a baby… I have no idea what to do.
Hi Emily,
You just need to try!
I have just submitted a reply. I bet there are millions of Canadians who have made the same mistake. I think everyone who gets a letter should file a petition. Anyone interested in starting one and protesting and fighting this? It is such an outrageous theft of our money.
Gack!!! I got my letter yesterday and I owe $400 because I unwittingly transferred the $5000 to another account in May. What the hell? And what is up with multiplying the $5000 by the number of months it sat there. I only made $60 in interest in 2009. And I suppose I’m over contributed in 2010 because I added another $5000?
Can we make an organized appeal to the Minister of Finance? I’m sure (I hope anyway) that this was not the intent when they set this up.
Where can we go with this?
I paid the penalty tax ($125) in March as I don’t want to pay any other penalties or interests again. Also, I wrote a letter to CRA for waiving my penalty tax but they refused. The appeal took more than 2 months. I sent the appeal letter in early March and received a confirmation letter from CRA in middle April. The final result came in late May.
Thanks ‘Tax Guy’ for the help before.
Maybe letting the media involved is a way…
Small Fish –
I am contemplating whether I want to pay the tax and file an appeal, or file the appeal and risk getting charged more penalties/interest after June 30th deadline.
I feel that if I pay it, the CRA will have no reason to waive the fees, and would not want to refund the payment.
If I do not pay it, it would be eaiser for them to just waive the extra tax.
Decision, decisions.
I wrote an e-mail to the Minister of Finance and the Minister of National Revenue today. I also published a copy of the letter in today’s post.
http://blog.taxresource.ca/letter-to-jim-flaherty-tfsa-overcontribution-penalties/
Can someone please explain to me the steps they are taking and what forms need to be filled out to appeal this tax grab.
I’m not getting anywhere with the 2 fellows I talked to at the CRA. Something about an adminstrative relief letter.
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