From time-to-time, I will find that individuals will overcontribute to their TFSAs. This can happen when people don’t track their contributions, or we’ve heard of people opening accounts at banks but maybe the person didn’t quite understand whay a TFSA was. Clients can find out their TFSA contribution room by logging into their CRA accounts.
Over contributing can get expensive. Individuals who contribute excess amounts into their TFSA are subject to a penalty tax of 1% per month on the excess amount for each month that the TFSA is overcontributed. For example, a $5,000 over-contribution would attract a monthly penalty of $50. If this went unchecked for a year, $600 in penalty tax would be owed.
CRA has the discretion to waive this penalty tax if the excess amount resulted from reasonable error and the excess contribution, plus any income or capital gains reasonably attributable to them, is withdrawn without delay.
Some time ago in an industry publication, an area advisor wanted to find what happens if there is not sufficient money available for withdrawal to bring the TFSA back on side. They called CRA on behalf of the advisor and were told CRA at its discretion could waive the fee, but this is not a guaranteed practice. In another case CRA said that if the excess contribution could not be withdrawn without delay, they would not have the discretion to waive the penalty tax. As such, the penalty tax would continue to apply until the individual accumulated enough additional TFSA room to cover the excess contribution.
The takeaway is to be prudent when opening and contributing to your TFSAs. It is always best to make sure to check you contribution room via your CRA account.
And two quick reminders:
- The carriers do not track a client’s contribution room. This makes sense since the carriers have no way of knowing about other TFSAs the client may hold.
- When recontributing amounts to a TFSA, a good rule of thumb is to wait until the next calendar year to make the recontribution. This way you won’t run into any over contribution problems.
I hope you find this information useful and as always, feel free to reach out to me HERE.
THIS ARTICLE IS PROVIDED AS A GENERAL SOURCE OF INFORMATION ONLY AND SHOULD NOT BE CONSIDERED TO BE PERSONAL INVESTMENT OR LEGAL ADVICE. READERS SHOULD CONSULT WITH THEIR FINANCIAL OR LEGAL ADVISOR TO ENSURE IT IS SUITABLE FOR THEIR CIRCUMSTANCES.