What happens if you over-contribute to a TFSA?
January 25, 2023
When it comes to investing in a Tax-Free Savings Account (TFSA), careful planning and record-keeping must be used to ensure that you don’t end up over your TFSA contribution limit. The Canada Revenue Agency (CRA) is the entity responsible for tracking your contributions and withdrawals, and they are the ones you will hear from if you over-contribute.
What is the penalty?
If you over-contribute to your TFSA, CRA will levy a penalty against you for it. The penalty is 1% of the overage, per month. That means if your TFSA is over your limit for 5 months, you will be charged that 1% five times.
How do over-contributions happen?
We have seen overcontributions happen entirely innocently. Most commonly, a client didn’t understand that the “tax-efficient” account that their bank sold them years ago is, in fact, a registered TFSA. What can happen in these situations is a large deposit is made early in the year, withdrawn later in the year, and then replaced before the year is out. We have to remember that TFSA withdrawals are not added back to your TFSA limit until the following calendar year. That means the 2nd deposit put them over their limit, without them realizing.
EXAMPLE
Consider our example client Sandy:
- Sandy (45 years old) has misunderstood her TFSA, thinking it is just a savings account with the bank.
- In March 2022, she had a balance of $60,000. She had contributed $55,000 in 2021, meaning she earned $5,000 on her investment, great! (The TFSA limit at this time was $81,500. Her remaining room is $26,500). She has $15,000 she wants to set aside for a boat in the summer, so she deposits this to her “savings”. (In reality, she has now reduced her TFSA room to $11,500.) Now she has $75,000.
- In May 2022, she wants to withdraw $20,000 from her savings to buy a boat. Fun! Her balance is now $55,000.
- In October 2022, Sandy has sold her RV for $25,000, which she deposits in her “savings” (TFSA). Her balance is now $80,000.
She is still under the lifetime limit in 2022 based on her balance; however, Sandy has overcontributed. When she deposited her $25,000 from the RV sale to her TFSA, her contribution room was only $11,500, meaning she is $13,500 over-contributed from October-December. The withdrawal in May 2022 of $20,000 doesn’t get added back to her TFSA room until 2023. In January 2023, her TFSA limit went up by $6,500, and her $20,000 withdrawal from 2022 is now counted toward her new limit, so the over-contribution is done. In fact, her limit for 2023 is now $13,000. For 3 months, though, she was over her limit.
What do I do if I over-contributed?
Catching your TFSA over-contribution before CRA does could help as you might spare yourself the penalty. We have seen some leniency from CRA in the past for overages that were caught quickly. However, TFSAs have now been around for almost 15 years which, they argue, gives Canadians and their advisors plenty of opportunity and guidance to understand the rules by now.
If your TFSA is over its limit: take the overage out NOW. Don’t wait for a notice from CRA before acting.
The comments contained herein are a general discussion of certain issues intended as general information only and should not be relied upon as tax or legal advice. Please obtain independent professional advice, in the context of your particular circumstances. This Blog was written, designed, and produced by Natalie LeBlanc & David Moore, PFP, STI for the benefit of David Moore, PFP, STI who is an Investment Fund Advisor registered with Investia and does not necessarily reflect the opinion of Investia Financial Services Inc. The information contained in this article comes from sources we believe are reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any securities. Mutual Funds, approved exempt market products and/or exchange-traded funds are offered through Investia Financial Services Inc.
