It's Your Money  

TFSA over contributions

While the goal with a Tax-Free Savings Account (TFSA) should be to contribute as much as you can within the limits of your available contribution room, you also need to be mindful not to over-contribute.

Putting more money in a calendar year than you’re allowed by law could result in penalties. The severity of which will depend on the circumstances of the over-contribution.

Over-contributions made by mistake – If you unintentionally over-contributed because you believed you had more contribution room available than you actually did, what happens?

  • The CRA confirmed that those over-contributed amounts will result in a one per cent penalty tax assessed on the over-contributed amount (technically referred to as the “excess TFSA amount”).
  • This penalty tax is calculated monthly, based on your highest excess TFSA amount for that month, and this penalty tax will continue to apply for each month that the excess amount remains in your TFSA.

What can you do?

  • In an effort to minimize this penalty, you should plan to withdraw the excess amount as soon as you become aware of the issue.
  • Also, new TFSA contribution room that becomes available each year will also serve to reduce an excess TFSA amount.
  • So, in situations where you’ve identified you’re in an over-contributed state in your TFSA and it's near the end of the year, waiting until the new year may help eliminate the excess amount and avoid having to withdraw anything.

Deliberate over-contributions – Where you’ve over-contributed on purpose and it is determined to be a "deliberate over-contribution" based on the requirements of the Income Tax Act, the CRA confirmed that you will be subject to:

  • the one per cent penalty tax on the excess amount as outlined above, plus
  • a 100 per cent “advantage” tax which is calculated on any income or capital gains attributable to the deliberate over-contribution.

Basically, whatever investment earnings or gains you generated on the deliberate over-contribution will need to be paid to the CRA as the advantage tax, along with the penalty tax. This advantage tax continues to apply until you withdraw the deliberate over-contribution AND any associated income and capital gains from your TFSA.

How would the CRA know whether an over-contribution is a deliberate over-contribution or a mistake?

The reality is they won’t necessarily know and would need to review all the facts pertinent to your situation to come to a conclusion. That said, however, the CRA did also indicate that it “will closely examine any unusual TFSA transactions and will challenge aggressive tax planning where appropriate.”

To conclude:

Ultimately, understanding the implications of being over-contributed ensures you can act quickly when an issue is identified. This should also provide the foresight to avoid any aggressive planning or schemes with your TFSA that may seem “too good to be true.”

Where you are unsure of your contribution limit, the best source to confirm your available room is with the CRA themselves – typically through the 'My Account' portal via their website.

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About the Author

Brett, designated as a chartered investment manager and certified financial planner, is the regional director (Okanagan) for IG Wealth Management.

In addition to his “day job," Brett was appointed to the board of directors of FP Canada (formerly FPSC) in 2014, named as the board’s vice-chair in 2017 and took over as board chairman in 2019. 

Brett has been writing a weekly financial planning column since 2012 and provides his readers with easy to understand explanations of the complex financial challenges that they face in every stage of life.

Enhancing the financial literacy of Canadian consumers is a top priority of Brett’s and his ongoing efforts as a finance writer and on the regulatory side through the FP Canada board focus on this initiative.   

Please let Brett know if you have any topics that you’d like him to cover in future columns by emailing him at [email protected]

The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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