What Happens If I Over-Contribute To My TFSA?
The Tax Free Savings Account (“TFSA”) is a way for individuals who are 18 years of age or older, have a valid social insurance number, and are tax residents of Canada, to invest their money, and earn tax-free returns throughout their lifetime. The TFSA presents a great way for individuals to invest in qualified investments and earn investment income or capital gains tax-free, even when it is withdrawn.
The amount of money an individual can contribute to the TFSA in any given year is limited. As will be discussed, any over-contributions to the TFSA can result in severe penalties and should be withdrawn immediately.
What are Qualified Investments?
The types of investments permitted in a TFSA includes:
- Mutual funds;
- Securities listed on a designated stock exchange;
- Bonds; and
- Certain shares of small business corporations.
What are Prohibited Investments?
In contrast, prohibited investments include:
- Debt of the holder;
- A debt or share of an interest in a corporation, trust, or partnership in which the holder has more than 10% interest, considering non-arm’s length holdings; and
- A debt or share of a corporation, trust, or partnership with which the holder does not deal at arm’s length.
What are the Annual Contribution Limits?
The TFSA contribution room is the maximum amount that an individual may contribute to their TFSA.
- The annual TFSA dollar limit for the years 2009 to 2012 was $5,000;
- The annual TFSA dollar limit for the years 2013 and 2014 was $5,500;
- The annual TFSA dollar limit for the year 2015 was $10,000;
- The annual TFSA dollar limit for the year 2016 to 2018 was $5,500; and
- The annual TFSA dollar limit for the year 2019 and 2020 is $6,000.
If an individual was 18 or older in 2009, the TFSA contribution room grows each year even if he or she does not file a personal income tax return or open a TFSA.
If an individual turned 18 after 2009, the TFSA contribution room starts in the year someone turned 18 and the contribution limit begins to accumulate every year after that year.
It is important to note that the limit is a contribution limit, which means that any investment income earned by an individual’s TFSA contributions will not affect his or her contribution room for the current or future years.
For example, Jane turned 18 years old in 2015. Her contribution limit for 2015 is $10,000. She decides to contributes $1,000 to her TFSA and invest the money to purchase stocks on the Toronto Stock Exchange. At the end of 2015, the stock rises in value and Jane decides to sell the stock for $2,000. Although she received $2,000 from selling her stock, her contribution limit for 2015 remains at $9,000 and she will receive an additional $5,500 contribution room in 2016.
For an accurate figure of your current TFSA contribution limit, you may find the information in your online CRA My Account portal. You may access your My Account portal here.
What happens when I withdrawal from my TFSA?
It is important to note that withdrawing funds from a TFSA means you cannot contribute that amount until the next calendar year. Furthermore, any additional contributions in the same calendar year will count towards the current limit for the year. This is one of the most common causes of TFSA over-contributions.
For example, Jane turned 18 years old in 2015. Her contribution limit for 2015 is $10,000. She decides to contribute $10,000 to her TFSA in January 2015. In July 2015, she withdrew $10,000 from her TFSA. In December 2015, she put back $10,000 into her TFSA. Since withdrawals do not reduce the contribution limit for the year, Jane over contributed to her TFSA by $10,000 for 2015.
What happens when I Over-Contribute to my TFSA?
The rules state that for every month an individual has an excess TFSA amount, the individual is subject to a 1% penalty of the highest excess amount in the account for that given month. Due to the compounding nature of the CRA’s interest charges, the amount owed to the CRA can quickly snowball if the over-contribution is not discovered immediately.
For example, if an individual over contributed $10,000 in July of 2015, the individual will be required to pay 1% every month until the excess is removed. If the over-contribution is not discovered until 12 months later, the interest can easily accumulate to $1,268.25.
What can I do if I Over-Contributed to my TFSA?
Depending on the circumstances, individuals may have several recourses to address the over-contribution.
If the individual discovers the over-contribution before the CRA, they may seek interest relief through the Voluntary Disclosures Program. The Voluntary Disclosure Program provides taxpayers with an opportunity to proactively fix errors and omissions in their tax filings before the CRA knows or contacts them about it. It is also important the individual immediately withdraws the over-contribution to bring it within their allowable limit.
If the individual has already been notified by the CRA about the over-contribution, they may seek interest relief through an application for Taxpayer Relief. Depending on the unique circumstances of the case, the CRA may be inclined to remove the penalty charged for the over-contribution.
If you have over-contributed to your TFSA, and you want to discuss your options, contact us today for a consultation with one of our experts. We are here to help!
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.