What to do if you overcontribute to your TFSA?

What to do if you overcontribute to your TFSA?
What to do if you overcontribute to your TFSA?

The TFSA is a very popular savings plan, so much so that some taxpayers exceed the amount of contributions allowed. What are the consequences ?

Excess contributions to a Tax-Free Savings Account (TFSA) are more common than you might think, explains Daniel Harissa, financial security advisor at Lafond, Financial Services and vice-president of financial management at Waltr.

“In fact, you can hold TFSAs in several financial institutions and you end up getting lost. Or, our TFSA is maximized, we make a withdrawal then we contribute again during the same year. But you should know that the contribution rights will only be recovered the following calendar year and we therefore find ourselves in a situation of excess contribution,” he illustrates.

Another scenario: you close your TFSA in one financial institution to transfer it yourself to another. In this case, the tax authorities consider that you will have contributed again to your TFSA. The transfer must be made directly between banks to avoid the penalty.

Do you think you can trust the amounts indicated on the statement sent annually by the Canada Revenue Agency? Be careful, because they are not necessarily up to date! They are based on information communicated by banks to the government and the information is not always complete for the current year.

Costly consequences

Daniel Harissa urges caution, because in fact, the government places the responsibility for monitoring TFSA contributions on the shoulders of taxpayers.

If you have put too much money into this savings plan, withdraw it as soon as you notice.

The IRS can send you a letter to this effect, but it may take some time. You are exposed to a penalty representing 1% per month of the excess contributions, which is why you must act as quickly as possible.

“When you have made this mistake in good faith, you can always contact the tax authorities to explain the situation and the reasons why you contributed too much. They can sometimes be lenient,” says the financial planner.

On its website, the Canada Revenue Agency specifies that it can agree to cancel or waive these penalties in whole or in part by taking into account a certain number of considerations, in particular when the taxpayer demonstrates that he has made a reasonable error.

The annual ceiling and accrued rights

Remember that for 2024, the annual TFSA contribution limit is $7,000. The total contribution room accumulated since the creation of the Tax-Free Savings Account in 2009 is currently $95,000 for Canadian residents who were at least 18 years old on that date.

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