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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Hi Tax Guy, I just want to comment on something you said earlier on. You corrected a commenter saying that this is a “tax” not a “fine” and claimed it was mere semantics. I disagree with you. The dictionary defines a “fine” as a sum of money imposed as a penalty, and that’s definitely what this is. We are all being “fined” for the crime of ignorance of tax law.
It would be a “tax” if we had gained any kind of benefit from this, but the vast majority never exceeded the $5000 limit, and therefore gained no benefit from these “overages” which were not overages at all.
I am having a similar experience and let me explain why I think it’s a scam:
I opened a TFSA with PC Financial; they advertised a 3.75% interest rate if you opened a TFSA with them. This was (and still is) an awesome interest rate at the end of 2008. I immediately placed my entire $5000 contribution into a PC Financial TFSA which opened January 01, 2009. By February 01, 2009 that interest rate had dropped to 0.75%. This is essentially a bait and switch, and while predatory practices like this are bad enough with a regular bank account, the fact that the TFSA was a new financial tool, and was not explained to me by my banking representative, creates a malicious situation. My entire TFSA contribution is now being held by a bank with a pathetic interest rate compared to what I was promised.
I moved my money into an ING Direct TFSA which offered a better interest rate, they then dropped their interest rates, so I moved it back to PC, who then dropped their interest rates even further, the result of which is I eventually said screw it and emptied my TFSA entirely.
I am guilty of not properly understanding a service I was using; but by the same token there was no attempt to make educate me by the service providers, and the result is that they benefited at my detriment.
While I understand that there is a reason for this taxing of overages, it is unfair to use it as a punishment for those who did nothing wrong. My TFSA balance at NO TIME EVER exceeded $5000, yet I am being taxed for $25, 000 worth of overages. I do not think it is fair to tax someone for $25, 000 worth of overages in a period where they had less than $10, 000 in the bank.
In other words, taxing people who have a balance exceeding $5, 000 is fair, but taxing people whose contributions exceed $5, 000 is not fair. I think I made about $30 in interest on my TFSA, and now it’s costing me $250 in “taxes” that I can scarcely afford.
This is not a tax, it is a fine. This is not something that people simply pursued on their own. It is something which was advertised and pushed by both the government and banks, and so they have at least some responsibility to educate their customers about the product that they are providing, rather than exploiting them and then exacting unilateral punishments.
Mike,
The TFSA is a “tax-free” account. The government wants to tax amounts in TFSA’s that should not have been there.
It’s not a fine. It is a tax on amounts that should not be in a tax-free account.
I disagree Tax Guy, it’s not a tax on amounts that should not be in the account, because the $25, 000 that I’m (and most others here) being taxed on was never in the account. If I was being taxed because I went $25, 000 over the limit I would certainly deserve the fine, but neither I nor most of the others commenting here did that.
This is especially poignant because it was advertised as a tax-free savings ACCOUNT which you were free to withdraw from at any time. This implied that it would be more like a savings account. If it was called a tax-free savings PLAN maybe I would be more likely to treat it like an RRSP. I thought I already knew the rules of savings accounts so I assumed that this could be treated like a regular savings account and the service providers (the government and banks) made no effort to clear up that confusion, instead their efforts served only to heighten it.
I want to thank you for sending that letter to Flaherty and Ashfield, I will be sending my own shortly following your example. Your letter was quite eloquent and I hope it (and your blog) motivate more people to do the same, hopefully there will be some kind of provision made for those of us who made honest errors, but as it stands I can’t even get through to the government.
Tax Guy, why not just tax the extra investment income at the normal tax rate according to our bracket? At least that would be fair. In a scheme (the word fits perfectly here) whereby the taxpayers were enticed to SAVE money, not pay extra out.
Tax Guy,
Why not just tax the extra investment income at the normal tax rate according to our bracket? At least that would be fair. In a scheme (the word fits perfectly here) whereby the taxpayers were enticed to SAVE money, not pay extra out.
I was bit by the TFSA fine print as well… Only for $50, but as a student, it still hurts.
I had my TFSA maxed out ($5000) at Online Bank A on Dec. 29, 2009. Then, seeing that Online Bank B offered a better rate, I withdrew the entire amount from A and deposited it at B (a transaction that went through on Dec. 30). So, bottom line: for less than 48 hours I had “overcontributed” to my TFSA by $5000 (in 2010 the contribution room went up, so it’s fine). By the CRA’s ridiculous formula, those 2 days (which would have earned me a whopping $0.02 in interest) result in a $50 penalty…. HOW?
While both banks were very clear that all your TFSAs combined cannot exceed $5000 (which mine never did), neither were clear on the withdrawal rules. They say things like “withdrawing money in 2009 makes room for contributions in 2010″. While this is correct, it does not explicitly say that such withdrawals DO NOT make room for later in 2009… In retrospect I see what they were getting at, but there are obviously better ways to communicate this. But, of course, the banks opt not to use that language, no doubt for marketing purposes. Reading the CRA documentation, things are clear – but when you’re banking online, no one tells you to read that!
I claim a small portion of the responsibility for apparently not doing enough homework… But the penalty system is clearly flawed, as is the communication regarding the rules. I can only imagine how many of these letters are being distributed right now, particularly to those banking online. With a new product like this, still seemingly in the beta stage, some leniency is required… but by the sounds of things, none is being granted. Like others, I plan to give the CRA a call as well, but my hopes are low. Hopefully enough people will bring this into the spotlight and something will be done!
I was hit by the same thing. Opened up a PC financial TFSA account put $5,000 in there. Later that year I got the money ready for a property purchase. The purchase didn’t go through, so I put it back where it was a week later. I’m now hit with a $350 tax bill on few dollars of earned interest.
What’s ironic about all this is that the same logic (stupidity) behind these over contribution penalties are allowing savvy investors through a TFSA loophole: http://www.financialpost.com/personal-finance/tfsa/Taxman+plans+crackdown+TFSA+loopholes/2138002/story.html
…. it’s the same old story, the rich get richer, the poor get poorer. Nothing new there, what gets me is how rosy this TFSA was painted when it was first rolled out. (and still is)
Normally I’m pretty skeptical about believing things that sound too good to be true. But in my worst dreams – the worst case scenario I could come up with was that the government would take all my interest that I earned and I’ll be left with just my contribution … after all I already paid my tax to them on the $5000 … so it’s mine forever … right? …….. maybe I’m not skeptical enough
My 2009 TFSA’s Transactions
====================
Jan05 2000.07
Jan09 3000.07
Feb11 (0.14)
Apr16 (5000)
Jun05 2000
Jun 16 (1000)
Jul22 1000
Sep03 1000
Sep21 1000
Oct 1000
Opps… I got my balance over 14 cents at some point, but I quickly fixed it. This is my own definition of over contribution of 14 cents here.
However, the CRA’s definition is different from mine. I never know that my withdrawals would not be added back to the limit until the following year.
Today, I received a letter from CRA that my total of the excess TFSA amount is $25,000, and I have to pay $250 for the tax penalty.
Quite an expensive lesson for me.
It’s interesting reading all the comments so far – there are obviously a lot of people in the same situation. My TFSA was also on-line with PC Financial and the balance was never above $5,000.
Thanks to the Tax Guy for writing the letter yesterday to the Ministers. And also a big thanks (and to others leaving comments) for keeping the tone of this forum respectful – I think we all appreciate not having what appears to be honest mistakes met with abusive comments from other readers (as on other websites).
I, too, got into this mess because I bank with PC Financial. I moved to them many years ago because they had no fees for their chequing account. Their banking is all Online.
Years ago, PC advertised an “Interest First Savings Account”. I clicked on it to open it up and started transfering some money from my chequing account to my savings accounts so I could get a better interest rate. And I would transfer money back to the chequing account again to pay bills. I would do this many times a year.
Then PC advertised an “Interest Plus Savings Account”. I clicked on that ad to open that account up as well. And started to use the Interest Plus Savings Account instead.
Then came the “Tax-Free Interest Plus Savings Account”. Clicked on that ad to open it up and began making deposits and withdrawals into it much the same way I had done for the two previous Savings Accounts that I opened with PC Financial.
I am a poor Canadian and I don’t know where I will get the money to pay this huge penalty.
My dilemma was with PC Financial as well — an online account.
I also notice warnings on the PC Financial website, I didn’t notice before regarding the tax penalty. Kind of makes me suspect they are recent additions to their website.
I got hit with almost $700 Penalty Fine, on revolving my same money for better rates, etc. — trust me, not happy.
I also wondered if I could tell the CRA I don’t want the account, and I don’t want to be registered for the TFSA, and that they can keep the full interest (under $90) in exchange for me not getting nailed with this crazy Penalty Tax.
As many of you, my total TFSA amount did not excess $5,000 on any day of 2009, but got the penalty too. I did my contribution of 2010 too. It seems I will have more penalty for the “excess amount” of 2010. TFSA is more like a trap rather than a benefit to tax payers. We fall into it now.
I think two things are with problems here. CRA’s penalty policy doesn’t make sense at all. People who did not excess $5,000 in their TFSA account(s) on any day of 2009 are innocent. For the people they might have excess amount, the penalty is too high. TFSA seems a tool to help CRA to collect money from public rather than benefit us.
Also, Banks didn’t take their responsibilities on warning their clients.
I know complain is useless. Let’s do something:
• Contact CRA, call or write a letter to them, explain your situation. Try to waive the penalty.
• Contact your financial institution(s). To see if they could change your transaction(s). And also let them know the reasonability you think from a client perspective.
• Contact your MP or MLA. Let them know our experience and dissatisfaction (maybe complains). Our voice should be heard not only on the forum. Hope MP or MLA can help us take action.
• Contact mess media. Let them know our stories. Push CRA to rethink about their policy. Make more people aware of the penalty policy.
• Tell your family, friends, colleagues…, avoid them in the situation as us in the future.
I didn’t get hit as hard as some did.
I was also mistakenly under the impression that I could use a TFSA as a means to store some funds for unexpected and/or even expected events without worrying about tax implications.
Property Tax and no interest/payment for a year deals…Basically every month I would deposit a 12th of what my property tax for the year would be and a 12th of what the no Int/Pay amount was so when it can time to pay Property Tax and/or the other purchase I would withdraw the amount and make the payment.
This allowed me to safely save the property Tax without having to pay the tax on the piddly amount of interest it would earn as it grew through the year. Likewise it allowed me to do the same with a no int/pay purchase without it costing me anything and hey if I made a few bucks so be it, but at least it wouldn’t impact my taxes.
Boy was I wrong! I am only on the hook for $61 but it is not the amount it is the fact that the money I put in to that account was after the CRA took their share off my pay every month…and now the taxing me again on the same money. Semantics aside I already paid income taxes on the money they are penalizing me on not on the interest I earned which would make more sense since this is the only Tax free reason for putting money into this type of account anyhow?!
Just like others here I wasn’t trying to avoid paying taxes by abusing the loophole, I was just the sucker that made a mistake in understanding the rules that were never made clear in the first place.
It is not a Tax Free Savings Account, it is a vehicle for the CRA to further levy taxes on the unsuspecting masses. Here I thought we were finally being given a bone for once. Stupid Trusting idiot that I am. We were actually being given another way to dig ourselves another hole to fall into.
Hey maybe they are doing this to reclaim some of the tax revenue they lost on the Home Reno Tax Credit from 2009. Just a thought!
I had the same letter. My bank never told me about TFSA and how they worked. I transferred a bond over to what i thought was a GIC. i did have a TFSA acct at another bank. The interest accrued is not much for a TFSA, but paying 600$ for having an “excess” amount is ludicrous. So much for the interest i thought i had, i’m 400$ in the hole now. Thanks CRA, for helping us all save money!
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