The rules set up by CRA for Tax Free Savings Accounts (TFSAs’) can be confusing, and for that reason, many people tend to over contribute to their TFSA and when they get charged, they don’t understand why. We want to help simplify these rules for you so you can get the most out of your TFSA without having to pay any penalties.
The first thing to keep in mind is that there is a limit on how much you can contribute in a year to your TFSA. There is a yearly limit of $5 000, plus any unused contribution room from previous years. You can find this amount on your notice of assessment issued by the CRA. You can also find out online through their website if you already have your account set up with them.
Another thing to remember is that when you withdraw money from your TFSA, that does not give you additional contribution room for the year you withdraw. For example, your contribution room is
$5 000, you deposit $5 000, then withdraw $2 000, you cannot contribute again as you have already made the maximum contribution. However, the $2 000 that you withdraw, will be available for contribution again in the following fiscal year. Giving you $7 000 of contribution room.
For any excess contributions you may make over your contribution room, you will be charged a penalty of 1% per month on the excess amounts you contribute to your account. For example, your contribution room is $8 000, but you put in $10 000, you will be charged 1% per month on the excess contributions, which in this case is $2 000. This penalty charge will be charged by CRA.
If you have a TFSA and find yourself over contributing, or want to open one, here are some ways to avoid over contributing in any fiscal year:
• Don’t use it as a regular savings or chequing account – don’t deposit your paycheques and withdraw money regularly.
• Beware of how much you are allowed to contribute each year – either by checking the CRA website or your notice of assessment
• Keep track of all the contributions and withdrawals you make. CRA offers a detailed chart to keep track of this on their website
• You can also check with your financial institution on contribution limits and rules for further clarification
If you still find that you have over contributed to your TFSA, notify CRA, with a detailed description of your contributions, withdrawals, and any other sufficient evidence. This is done by completing a Tax Free Savings Account Return. This is due by June 30th of the following year from which the over-contribution was made and you should also include payment for the penalties on excess contributions. If it is filed later than June 30th, penalties will be charged on the existing amounts owing to CRA.
For more detailed information on TFSA, go to the CRA’s website, talk to us, or your financial institution.