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TFSA Over Contributions

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 [1] 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)

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 [2] 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.