According to a recent BMO survey, while most Canadians (60%) know about the existence of a Tax Free Savings Account (TFSA), less than half (44%) were able to say how much the annual contribution maximum is. In this context, it’s not surprising to learn that every year, thousands of Canadians end up having to pay penalties for over-contributing.
This year only, over 60,000 Canadians have received a letter from the Canada Revenue Agency (CRA) informing them that they have entered penalty zone, which results in a special tax of 1% per month that is based off their excess contribution. This is a rather hefty penalty that can, for example, amount to about $700 for an excess contribution of $5800 per year.
On January 1st, 2013, the contribution maximum was raised from $5000 per year to $5500. Unused contributions from past years can be carried forward from year to year. For example, someone who has never contributed to a TFSA since the program was introduced in 2009 could put as much as $25,500 in a single year.
However, this part is quite straightforward and not one that is a stumbling block for most. Where it gets tricky is that savers can take their money out of their account any time they want and put it back only the next year (unless they have unused contribution rights). In fact, since many don’t wait the necessary amount of time before depositing the money back into their tax-free savings account, this is where many get caught with fees.
It may sound like a far-fetched situation to some, but let’s say you were planning on going for a trip and had to cancel at the last second. You could have initially taken $2,000 out of your TFSA and decided to put it back once the trip had been cancelled, causing to potentially exceed your yearly limit without knowing it.
The Bottom Line
Before contributing to your account, communicating with the CRA could be a good idea to avoid any doubt or bad surpises. All relevant TFSA-related information can also be found at Canada Revenu Agency‘s My Account section.
Considering that about 8,2 million Canadians have a tax-free savings account, awareness over basic information such as contribution maximum should definitely be made clear. Hopefully, after you have read this article, you won’t ever get caught with this type of penalty.
Are you interested in learning more about investing your money? Have a look at this article about a beginner’s experience with Self-Directed RSP’s.