Beware TFSA Over-Contributions

Daniel Steinkey |

We’ve talked about TFSAs (tax-free savings accounts) before as a great vehicle for savings, particularly growing your savings tax-free. But there is one issue to be aware of: over-contributions.

TFSA Limits

The annual limits for TFSA contributions have changed. They started at $5,000, moved as high as $10,000 under the previous Conservative government, then moved back down to $5,500 by the current Liberal government. The maximum anyone could have contributed into a TFSA by 2017 is $52,000. That’s a nice chunk of change, and your gains won’t be taxed.

However, there have been issues with people over-contributing. Some of that is people simply not paying attention to or caring about the rules. But some of the over-contributions come from confusion around withdrawals and re-deposits of money in the same year.

If you have contributed the maximum amount of $52,000 and you withdraw any money this year, you cannot replace it in 2017. That would count as an over-contribution, even if your total contributions made currently sit at or below $52,000. If your TFSA is maxed out, you must wait until next year to add back any money you take out. So, if you took out $5,000 this year, leaving you with $47,000 in contributions, you could add the $5,000 back in 2018, along with next year’s contribution amount (currently slated to be $5,500) for a total of $10,500. This seems a little confusing, but it’s important to remember.

What Happens When You Over-Contribute

If CRA catches you over-contributing, you will pay a penalty tax equal to 1% of the highest excess amount in your account for the month. You will pay this penalty each month the excess remains in your account. For example, if you have contributed $1,000 over the maximum allowed amount, you will pay a $10 tax for each month this $1,000 stays in your TFSA.

CRA reported this year that they are trying to collect tax on $75 million of TFSA money this year. Their audit reported the majority of this money comes from over-contributions to TFSA accounts. (Some of it comes from using TFSAs as day trading accounts, not allowed as part of the TFSA rules.) That’s a lot of money.

Bottom Line

If you are fortunate enough to be able to maximize your TFSA contributions and still have money left over, remember to look at your RRSPs and other investing/saving vehicles for the rest of your money. Over-contributing isn’t worth the hassle of paying penalties to CRA.