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Did You Over-Contribute to Your TFSA? You're Not Alone

Aug. 14, 2014
4 mins
A hand drops coins into a mason jar while keeping track of savings with a notepad and calculator

The Tax Free Savings Account (TFSA) has now been available to Canadian consumers for six years - but Canadians are still unclear on how to use it.

The TFSA is a registered savings vehicle that allows money inside it to grow tax-free. This is unlike the Registered Retirement Savings Plan (RRSP), where tax must be paid upon withdrawal. Within set guidelines, the TFSA allows Canadians to easily withdraw and deposit money. However, it's these guidelines that still trip up banking customers - and they're paying fees for their mistakes.

Understanding Your TFSA

The TFSA allows Canadians, age 18 and over, to set money aside tax-free throughout their lifetime. Each calendar year, you can contribute up to the TFSA dollar limit for the year (the annual contribution limit in 2014 is $5500), plus any unused TFSA contribution room from the previous year, and the amount you withdrew the year before. However, the biggest mistake made by Canadians is maxing out their annual contribution room, withdrawing their funds, and then attempting to restore them within the same calendar year - a big tax no-no.

Don't Get Caught With An Over-Contribution Penalty

Last year, the Canada Revenue Agency sent out 54,700 warnings about TFSA over contributions, telling those taxpayers they were facing a penalty. Even my dear old dad, who taught me so much about personal finance, had contribution questions - but I’ll get to him later. Meantime, here’s a refresher on TFSA rules and how contributions work.

TFSA Basics

What type of investments can a TFSA hold? Generally, the types of investments permitted in a TFSA are the same as those in a RRSP. Including:

  • Cash
  • Mutual funds
  • Securities listed on a designated stock exchange
  • Guaranteed investment certificates (GICs)
  • Bonds
  • Certain shares of small business corporations

TFSA Contribution Rules

More than 10 million Canadians have registered to open a TFSA.  Every year they receive contribution room. Once created, that room stays forever and the TFSA has no expiry date. In essence if you opened a TFSA in 2009 and contributed nothing, you will have already created $31,000 in contribution room. $5000 for the first four years and that number increased to $5500 in 2013.

TFSA Contribution Problems

But imagine you have been contributing the maximum amount ever year and that sum has grown to $40,000, because of a good return on your investments and now you want to withdraw. If you take $10,000 out this year, for example, you’ll create that much contribution room in your TFSA. But that room won’t be available until next year. It’s the “next year” part that Canadians get confused about. By over contributing any year to your TFSA you will be subject to a tax equal to 1 per cent on the total amount in the month the over contribution was at the highest excess.

Canadian Are Getting Smarter About TFSAs

In 2010, the year after the TFSA was first introduced, more than 103,000 Canadians received notice they had over-contributed. The reduction in penalty letters is a sign more people are reading up on the rules of TFSA contribution.  As well, Revenue Canada has been lenient on those that over contribute; 17,000 people had their penalty forgiven in 2012. The average penalty waived has been $516 or $9 millon in total.  There’s no clear reason and definitely no mandate that explains why this is a happening, but if I was to speculate, it’s because so many Canadians are in record amounts of debt. The government has an agenda to keep Canadians excited and encouraged to save. A TSFA penalty for saving too much might deter some from using the account again.

Even The Savviest Are Confused

I’m still amazed as to how little people know about TFSAs and registered accounts in general. - but I was not expecting my father over dinner last night to ask me this question: “I have not contributed anything in my TFSA this year, but I want to take $6500 out. Can I put that money back this year or do I have to wait until the next calendar year.”

The answer to my dad’s question is, you can put $5500 back in because that is the contribution room you have left, but the $6500 room you created from taking money out from your TFSA will not be available until next year.

What I found amazing, is my dad, who I have learnt so much about finance from, is confused as to how the TFSA works. If that’s the case, I can forgive anyone who doesn’t understand the rules clearly. This may be a case where banks and Revenue Canada needs to make better information available. We also decided last night that by calling it a “savings account” people think it’s like an account that is open at a bank along with your chequing. They don’t understand the depth of what a TFSA can do. We agree changing the name to “Tax Free Savings Program” would be a better title. Maybe if Revenue Canada is reading this they can take the Ahmed-Haq suggestion up for consideration.

Rubina Ahmed-Haq

Rubina Ahmed-Haq is a financial journalist and personal finance expert with more than 15 years of experience. Her career spans three continents with appearances on TV, radio, print and online. She is the Finance Editor for HOMES Publishing. You can also read her columns in CondoLife and Active Life. Rubina runs the website www.AlwaysSaveMoney.ca. She has also contributed on personal finance matters at The Toronto Star, The Globe and Mail, National Post, CTV Newschannel, Mississauga Life Magazine, Masalamomma.ca, OurKidsMedia, CAA Magazine, South Asian Focus TV, ANOKHI Magazine, Bridal Fantasy Magazine, Canadian Running Magazine, FRESH JUICE magazine and NEWSTALK 1010.

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