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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Thanks for the support Tax Guy!! I do think the banks should play a larger role in warning their clients of these penalties. I feel there was virtually no client protection in place. It’s kind of ironic that it’s called a TAX FREE SAVINGS ACCOUNT, and I am facing a PENALTY TAX.
Brad,
The banks and financial institutions need to take some responsibility as well. But clearly the TFSA was more confusing than most had thought and some forgiveness should be in order.
Call your MP!
I’m kind of relieved that I’m not the only one that this has happened to.
I got my letter from CRA on Monday saying that I owe them nearly $600. I had no clue what they were talking about at first as I had about $4000 in my investment TFSA account and was careful not to go over the limit.
As it turns out, it was because I signed up for TFSA savings account through PC in Jan. 2009. In retrospect, I’m not even sure why I signed up for it because the interest I earn from savings isn’t really worth it. Anyway, because it was an online form, at some point my entire savings ($32,000+ as I was about to put a down payment on a house) was transferred into my “new” TFSA savings account. I didn’t find out until 2 days after, and I immediately transferred all the money out. I didn’t know about this 1 day rule and the rest is history after that. My bank failed to ever inform me that this might affect my TFSA contribution and try to make a correction. So I blindly left about $4000 worth of investments in another TFSA investment account which the CRA saw as over the limit contribution.
I don’t understand how this law is preventing true exploiters from using the TFSA to their advantage. And it’s only penalizing Canadians like us who had no such intentions. My savings account gave me close to nothing for interest I earned for the 3 days I had the money in my account. Yet I am being taxed $600 for it. None of it makes a lot of sense. Shouldn’t the tax be based on the INTEREST you earned based on your over-contribution?
I called my bank (PC) to try and get them to reverse the transactions and notify CRA. But they said it was too late to change anything. I called CRA yesterday to plead my case, but they only said they just follow the statements that my bank gives them. Are we the consumers really at fault here?
Great Story. It shows how such a simple account can cause so many issues.
Update – I called CRA back and explained my situation again. They told me to write them a letter back with all the details included and request “administrative relief”. Hopefully they will waive the tax. Thanks again for writing to Jim Flaherty on our behalf!
I have the same complaint with PC. I specifically called them to ask them to shut down my account so I could transfer it elsewhere, expecting to pay a fee as you do with RRSPs and was told that there is no fee to transfer money, there are no CRA penalties, that the account works just like any other savings account. I was encouraged to keep the account open, in fact, in case I wished to recontribute in the future. The rest, as they say, is history. I made this mistake in January which means I owe a clean $600 because I assumed a bank teller knew what they were talking about. Never again will I bank at PC.
To those of you who would like to contact the CRA Minister as a first step, here’s the link:
http://www.cra-arc.gc.ca/gncy/mnstr/mlng-eng.html
Tax Guy and everyone,
Is there something we can do together to make a change?..since there are a lot of VICTIMS here…
I wrote to both Ministers this morning. You could try that. Drown them in complaints.
Call your local MP as well. Ask them to bring it to the Minister of Finance.
ya…let’s flood them with all our complaint letters….
I know I should read the terms and understand it…but…such a SCAM~~~
I’m more and more mad about this as it sinks in. I would definitely settle in giving up the crap interest I accrued in exchange for no penalty tax. I don’t understand why they don’t go after taxing the interest only? Why are they gouging at money that technically doesn’t even exist (in my case, revolving $5000, etc.)?
Is it possible to have a petition or something regarding this?
I have been burned by a very similar situation. I was encouraged by the governement and my bank to convert my existing savings account over to a TFSA. The bank was clear about the “TFSA Amount Limit”, but gave the impression that it was a balance limit not a contribution limit. They were quick to advertise the consistent functionality and access to your money in the TFSA account. Now after carefully maintaining a balance below $5000 last year and $10,000 this year I am faced with a $125 tax for 2009 and who know how much for 2010! I have closed the account (also a mistake as it turns out) and am submitting a taxpayer relief form on advice from a CRA service rep.
Sounds like to may have withdrawn and deposited in the same year. Withdrawals don’t affect your contribution limits until the following year.
What if i have a tfsa account that i opened last year. mid year i decided to change the way it was invested and transfered to another tax free savings investment option. I have been told that i have over contributed but i only had the 5000.00 in it was just transfered from one facility to the next. How is this corrected so i do not incur the charge.
thank you
Julie,
You can transfer your TFSA to another TFSA. You can’t withdraw and walk across the street and deposit it to a new TFSA. Rather you go to your new FI and tell them you want your TFSA at XYZ Bank trnaferred to your TFSAatMBA Bank.
Hi All,
I got my bill today for $300.00.
In July 2009, I took out $5000 from PC Financial (interest rates tanked) and moved it to a brokerage account 2 days later.
They now tell me that I owe 1% of 30,000 (5K * 6 months)… I find the logic behind their math to be outrageous!
Needless to say, I have drafted a letter and will be sending it to the TFSA Processing Unit.
I realized the error early in 2010, after people started talking about this penalty. I do not agree to marketing the TFSA account as “free to withdrawal anytime”, without stating in the same bold print that you can’y put it back in within the same calender year.
I hoping to have this waived, good luck to everyone.
-Jordan
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