A tax-free savings account is, by definition, well . . . tax free. But there is a scenario in which your account can be taxed 1% per month.
How is this possible?
The answer is in the event of over contribution.
In 2022, the government of Canada received $132 million in over contribution penalties. (Source: The Globe and Mail)
Now, most people do not set out to disobey the rules around contribution limits. The problem is misinformation.
The average Canadian has 1.5 TFSAs (Source: The Globe and Mail). Let’s round that up to two. So if you have two different accounts managed by two different advisors at two different financial institutions, who is going to keep track of your contribution room? If you thought the CRA will track it for you, you thought wrong.
It is true. If you sign onto your CRA account online, you will see your TFSA contribution room. However, the problem is financial institutions have until the end of February to supply this information, so the CRA portal is not always up to date.
To prove our point, Faisal signed into his CRA account online. While he has maximized his TFSA contributions to the end of 2023, the CRA website said that he has $13,500 of contribution room. If Faisal transferred the full amount into his TFSA, that would mean he contributed the $7,000 allowable for 2024 plus an extra $6,500. Even though he was basing his contribution on the information the CRA website provided, that extra $6,500 would have been penalized 1% every month. If he didn’t notice the over contribution for 20 months, that would be a total penalty of $1,300.
So what is the lesson we can learn?
At the end of the day, it is the individual’s responsibility to track contribution room.
The best way to keep track is with a self audit. Start with the information on the CRA website. If you are unsure of which contributions are included in the CRA’s number, try exploring the “transaction summary” on MyAccount to ensure it accurately reflects your contributions from the previous year. If you work with financial advisors, ask them for your contribution history on their end. Keep in mind that if you work with multiple advisors or if you have transferred your TFSA to a different institution, they will only have part of the story. Lastly, speak to your accountant. He or she should have a record of your contribution receipts.
It may seem like a lot of work, but it is worthwhile if it helps you avoid a penalty.
And if you do end up over contributing?
Talk to your advisor as soon as possible and withdraw the excess amount. The CRA has a system in place to reverse over contributions, and you can request that they waive a penalty if it was due to reasonable error. However, be forewarned that filling out the forms and waiting for the CRA to process the reversal can take time.
Keeping track of your TFSA transactions, working with a team, and getting tax advice along the way will help you contribute the right amount the first time.
Want to learn more about strategies to minimize your tax bill? Come to our seminar on March 5 at The Carriage House. Register here.
Clients are advised to seek advice regarding their particular circumstances from their personal tax and legal advisors.
