RRSPs RRIFs and TFSAs -> Tax-free savings accounts (TFSAs) -> Don't over contribute!

Tax-free savings account (TFSA) excess contributions

Your contribution room is determined at the beginning of each tax year.  If you have $5,000 in contribution room, and make a $5,000 deposit to your TFSA, then you cannot make further contributions to your TFSA in the same tax year, even if you make a withdrawal.  Withdrawn amounts will increase your contribution room, but not until the next tax year.

The tax payable for excess contributions to a tax-free savings account is 1% per month, for any month in which there is an excess amount at any time in the month.  This means there will be a tax payable even if the excess amount is withdrawn in the same month in which it is contributed.  You may also be charged a penalty of 100% of any income earned from the excess contribution.

Timing is important!

Example 1:  John had $5,000 contribution room at the beginning of 2009.  He made the following TFSA transactions:

The excess contribution amount is $4,000 for February 2009, and John will pay a tax of 1% x $4,000, or $40.

Example 2:  Jane had $5,000 contribution room at the beginning of 2009.  She made the following TFSA transactions:

The excess contribution amount is $4,000, for the months July to December inclusive.  The tax payable is $4,000 x 1% x 6 months, or $240.

Transferring Your Account

If you want to transfer your TFSA to another financial institution, DO NOT just withdraw the funds, then re-deposit into an account at the new financial institution.  This would constitute a withdrawal, and you cannot re-contribute the funds until the following year.  You must get the new financial institution to do the paperwork to transfer the funds in the correct manner.

Letter / TFSA Return From Canada Revenue Agency

If you receive a TFSA return from Canada Revenue Agency (CRA) asking to provide further information about your TFSA due to an apparent over-contribution in 2010, it is important to respond to the letter within 60 days.  An August 19, 2011 news release indicates that CRA will be as flexible as possible in cases where a genuine misunderstanding of the TFSA contribution rules occurred.  You will be able to ask CRA to review your specific file and, where appropriate, waive taxes on excess contributions for 2010.

Tax Tips:

Know the rules, and do not make excess contributions!

If you did make an excess contribution, withdraw the amount ASAP.