In early January, we received a couple of letters from Canada Revenue Agency (CRA). The letters were not something we were expecting - the CRA informed us that we have over contributed Mrs. T's TFSA by $10,000 since 2012. At first we were both shocked and thought that the CRA had made a mistake. We have always contributed the maximum allowed amount each year, $5,000 in 2009, 2010, 2011, and 2012; 5,500 in 2013, 2014, and 2015 (this is before the recent 2015 announcement of 2015 TFSA limit increasing to $10,000). The total allowed amount adds up to $36,500, exactly what we've put in. Needless to say, we were very confused.
The next morning Mrs. T phoned the CRA after many tries and found out that we've made a mistake in calculation her TFSA contribution limit. According to the TFSA contribution rules:
Starting in 2009, TFSA contribution room accumulates every year, if at any time in the calendar year you are 18 years of age or older, have a valid Canadian social insurance number and are a resident of Canada.
Because Mrs. T became a Canadian permanent resident in 2011, she was not eligible to contribute money in the TFSA until 2011, meaning she did not have contribution room from 2009 and 2010 ($10,000 in total). We mis-read the rule! Oops!
Because the mistake was made in 2012, the 1% tax penalty compounded since mid 2012. CRA calculates the penalty not by how much you over-contributed, but by the excess amount remaining in the TFSA. It will continue to apply until whichever of the following happens first:
- the entire excess amount is withdrawn; or
- for eligible individuals, the entire excess amount is absorbed by additions to their unused TFSA contribution room in the following years.
Over contributing TFSA
Because we usually make the new maximum allowed annual contribution at beginning of each year for Mrs. T's TFSA, the excess amount was never absorbed by the additional unused TFSA contribution room in the following years. Since Mrs. T's TFSA portfolio has done reasonably well, our honest mistake resulted a tax penalty close to $1,500. Ouch!
Mrs. T asked the CRA agent what to do during the phone conversation and learned that we should withdraw the over contribution amount immediately, send a cheque with the full tax penalty amount owed, and a letter with explanation and plead for our case. This is exactly what we did.
What to do when I over contributed TFSA
In case you want to see a step by step summary of what we did for over contributing TFSA
- Call the CRA at 1-800-959-8281 right away and find out about the over contribution. Get some clarification first.
- Get the over contribution amount out of your TFSA immediately. The 1% tax penalty per month counts even if you only have the money for 1 day of the month. In our case we didn't want to sell the dividend stocks so we transferred them from Mrs. T's TFSA to her regular account in-kind. Because the stock price varies daily, we had to make sure we transfer slightly more than $10,000 worth of stock shares. The in-kind transfer took a few days to complete with Questrade.
- Fill out the Over Contribution form, and send a cheque with the penalty amount. The CRA gives you limited amount of time to pay. If you don't pay within this time, you will get charged more.
- Write a detailed letter and provide all the explanation to plead for forgiveness. We sent the letter along with the Over Contribution form and the cheque to the address listed in the CRA's letter. The typical process time takes about 12 weeks. Unfortunately we forgot to include the withdraw statement to demonstrate step 1 so we had to send this statement separately. Our recommendation is to include this statement and any details/proofs of the withdraw to avoid processing delays.
- Wait and hope for the best.
When Mrs. T talked to the CRA agent, the agent was quite sympathetic with our situation. She understood it was a honest mistake that compounded itself over the years. She also found it odd that we didn't get informed until 3 years after the fact. She didn't go as far as saying that the CRA will forgive us and waive the penalty tax. Since it would take 12 weeks or more to process our case, she strongly recommended us paying the penalty right away to avoid further penalties.
A few months after we sent in the withdraw statement, I noticed that we got a direct deposit from the CRA. Shortly after, we received a letter from the CRA stating that they agreed with us and decided to waive the penalty tax that we owe from 2012, 2013, and 2014. Since they're still waiting for Questrade to provide the 2015 contribution information, they couldn't waive the 2015 penalty tax. We were informed that we'll probably get a over-contribution letter for 2015 and need to plead for forgiveness again. We'll definitely follow the steps and ask for forgiveness again when we receive such letter.
If you have a TFSA, definitely make sure you keep track of your contribution amount, this is especially true if you have multiple TFSA's with different financial institutions. Do you have any experience with TFSA over contribution that you want to share?
Update: We recently received a letter from CRA stating that we have been forgiven completely. This meant we didn't have to plead for forgiveness for 2015. Phew!