Review your TFSA to Avoid CRA PenaltiesChristopher Briggs, RRC®, Wealth Advisor
Over recent years, the Canada Revenue Agency (CRA) has increased its reviews of the TFSA, targeting holders that it considers to have over-contributed to the account. If an individual has exceeded their TFSA contribution limit for the first time, (s)he is sent a warning letter and/or Form RC243-P, Proposed TFSA Return. This form shows the amount of penalty tax due according to CRA records. If the excess TFSA amount has been removed prior to receiving the letter, no further action is required.
As such, if you may have inadvertently over-contributed, it may be worthwhile to review your TFSA now to make corrections before a penalty tax is assessed. Here are two areas where mistakes are often made:
- TFSA funds are withdrawn and recontributed within the same year. TFSA withdrawals do not create contribution room until the following calendar year. If you do not have contribution room available in a particular year, any recontributed funds would be considered as an over-contribution for that year.
- TFSA funds are withdrawn and transferred to another TFSA at a different financial institution. Although this can be done without penalty, it must be done through a direct transfer completed by the financial institution. If funds were withdrawn from one TFSA as cash and moved to another TFSA, this would be considered to be a withdrawal followed by a contribution. Contribution room for the withdrawal would not be created until the next calendar year.
What is the penalty? A TFSA penalty is assessed at one percent of the over-contribution amount per month until the excess amount has been removed from the TFSA (or contribution room becomes available). For example, an indirect transfer of $5,000 from one TFSA to another that is considered an over-contribution would be assessed a penalty of $50 per month, or $600 per year. Over time, these penalties can quickly add up.
How can you determine your contribution room? TFSA contribution room information is available on your CRA online account: “My Account”. You can also contact the CRA to request a TFSA Room Statement or TFSA Transaction Summary showing your contribution and withdrawal information.
If you have multiple TFSA accounts at different financial institutions, consider consolidating them to simplify their administration and avoid contribution errors. This may also improve management of your asset allocation or ease the settlement of an estate.