If you’re a long time reader, you know I love the TFSA. I believe everyone should treat TFSAs as a long-term retirement account, rather than a short term savings account. While TFSAs are a great tool for Canadians, many people have over contributed to their TFSAs and resulted in penalties applied by the Canada Revenue Agency (CRA). If you are one of them, don’t feel bad. A few years ago, we also received TFSA over contribution letters from the CRA. In the letters, the CRA informed us that we have TFSA over contribution in Mrs. T’s account by $10,000 for a duration of three years. The CRA informed us that we had to pay the 1% over contribution penalty for the entire duration, which added to a $3,600 over contribution fee we had to pay back to the CRA. This was certainly not a small amount of money!
Since we track our RRSP And TFSA contributions meticulously, we were totally shocked to see these letters about TFSA over contribution. Our first thought was that the CRA made a mistake. We have always contributed the maximum allowed amount each year. The contributions to Mrs. T’s account added up to the same amount of the maximum allowed limit since TFSA was available in 2009. Needless to say, we were very confused and I was freaking out about the penalty amount we had to pay. Since we went through this TFSA nightmare with the CRA and many Canadians have encountered the same problem, I thought I’d put together a guide on what to do with TFSA over contribution and how to ask the CRA for forgiveness.
What is the TFSA?
The Tax Free Savings Account was introduced in 2008 by the late Jim Flaherty and came into effect on January 1, 2009. It is a tax-advantaged account available to eligible individuals who are 18 or older with a valid social insurance number to set money aside to grow tax-free throughout their lifetime. You make a contribution to the TFSA with after-tax dollars. Unlike the RRSP, there is no income tax deduction with the TFSA. However, there are no complicated withdrawal rules and strategies involved with the TFSA. Contributions as well as any growth generated in the account are tax-free when you withdraw from the TFSA.
TFSA Contribution Guideline
- Each year there is a set TFSA contribution limit. This limit is indexed to the rate of inflation.
- You don’t need to earn an income to be eligible for a TFSA. If you are 18 and a Canadian citizen or a permanent resident, you can contribute to a TFSA.
- Your contribution allowance can be carried forward to later years. So if you didn’t save enough money this year, you can contribute in future years.
- You can have as many TFSA accounts with different financial institutions as you want but the yearly contribution limit is cumulative. A word of caution, if you have TFSA accounts with multiple financial institutions, make sure to track your contributions closely. This is one of the ways to easily over contribute to your TFSA.
- Contributions to a TFSA are made with after-tax money. Therefore, there’s no income tax deduction.
- You can transfer a TFSA from one financial institution to another but make sure you do a registered transfer and not a withdraw-then-transfer. Make sure to watch out for transfer fees.
- You can check your available TFSA contribution allowance on CRA’s My Account.
What is a TFSA Over-Contribution?
Although TFSA is a great savings vehicle, there’s a limit to how much you can put into your TFSA each year. And when you over contributed your TFSA, regardless of the reasons, the CRA does not take it lightly. This is why there are stiff penalties when you have over contributed your TFSA.
Over contributions to TFSAs are subject to a 1% penalty tax per month for the over contribution amount. In our case, the $10,000 over contribution was over three years. Since we didn’t know about this, we did not correct the over contribution mistake and the penalty compounded itself. As a result, we had to pay 1% of $10,000 for each month that we did not correct the mistake. This means $10,000 x 0.01 x 12 = $1,200 per year. Or $3,600 that we owe the CRA.
Note: RRSP has a $2,000 over contribution buffer. But there’s no such buffer with TFSAs, so you need to track your TFSA contributions very carefully.
How do you know if you over-contributed to your TFSA?
If you have over contributed to your TFSA, you will receive an “Excess Amount Letter” from the CRA. The letter will instruct you to remove the excess immediately. You will also receive a “Proposed TFSA Return” letter in which the CRA calculates the amount of penalties you owe.
The CRA has also stated that you can log in to your CRA account to check your TFSA contribution room. However, I have noticed that my CRA account isn’t always up to date. For example, although I have already maxed out my TFSA room for this year, my CRA account still says I have $6,000 left for contribution.
Therefore, I would not recommend relying on the CRA account for tracking your TFSA contribution limits. Always track your own TFSA contribution limit yourself! It’s a good idea to keep your TFSA contribution history via a spreadsheet.
What do I do if I over contributed to my TFSA?
The next morning after receiving the TFSA over contribution letters, Mrs. T phoned the CRA many times and eventually managed to talk to a CRA representative. She quickly found out that we did make a mistake in our calculation of 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 her TFSA until 2011, meaning she did not have contribution room from 2009 and 2010 ($10,000 in total).
So that’s exactly why we had over contributed to Mrs. T’s TFSA. Oops, we misread the TFSA contribution rules and the part about being a resident of Canada. For some reason, we just thought she was eligible to start in 2009, just like me. But the difference is that I was a Canadian citizen in 2009 while she did not become a Canadian resident until 2011.
In our case, when Mrs. T became a Canadian permanent resident, we immediately set up her TFSA account with Questrade. We then deposited $15,000 to her TFSA – then every January since we moved the maximum allowed amount for that year to her TFSA.
Since we didn’t receive the TFSA over contribution letter until three years later, the mistake compounded itself and the CRA deemed that we had to pay three years’ worth of contribution penalties of $3,600.
Ouch! That was a costly mistake!
Side Note: When we figured out the mistake, we were a bit annoyed why it took three years for the CRA to notify us. You’d think the CRA is communicating with Canadian financial institutions and tracking each individual’s TFSA contributions closely.
Un-doing the over contribution mistake
Because our TFSA over contribution mistake was made in 2012, the 1% tax penalty continued until we were notified. CRA calculates the penalty by how much you over-contributed. 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.
As mentioned, because we made the new maximum allowed annual contribution at the 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. So, our honest TFSA over contribution mistake resulted in a TFSA tax penalty of $3,600. Ouch!
During the phone conversation, Mrs. T asked the CRA representative what to do 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 our explanations and plead for our case. This is exactly what we did. After her phone call with the CRA representative, we immediately transferred the excess amount from her TFSA to her taxable account within Questrade. Given we did an in-kind stock transfer rather than a cash transfer and stock share price varies each day, we transferred enough shares of the different stocks to make sure we withdrew more than $10,000 just to be on the safe side.
We wrote a detailed letter and provided all the explanations on how we made an honest mistake. We also filled out the TFSA Over Contribution Form. We then sent the plead for forgiveness letter (i.e. TFSA over contribution penalty waiver letter), TFSA Over Contribution Form, and a cheque with the penalty amount to the CRA. We then waited and hoped for good news.
Step-by-Step Guide on TFSA over contributions
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 TFSA 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 TFSA Over Contribution form, and send a cheque with the penalty amount. The CRA gives you a limited amount of time to pay. If you don’t pay within this time, you will get charged more. Make sure you do this immediately upon receiving a letter from CRA regarding TFSA over contribution!
- Write a detailed letter and provide all the explanations to plead for forgiveness. We sent this TFSA over contribution penalty waiver letter along with the TFSA 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 withdrawal statement to show that we indeed had removed the excess amount. We ended up sending this statement separately after the CRA asked for evidence. This delayed CRA’s decision on whether to forgive us or not. I recommend including a TFSA withdrawal statement and any details/proofs of the withdrawal with our pleading for forgiveness letter to avoid any processing delays.
- Wait and hope for the best.
TFSA Over Contribution Penalty Waiver Letter – An Example
Here’s our TFSA over contribution penalty waiver letter that we sent to the CRA in case you wanted to see an example.
To whom it may concern,
RE: Your Tax-Free Savings Account (TFSA)
I’m writing to you because I received a letter from Canadian Revenue Agency stating that I have over-contributed $10,000 for the past three years. I would like to request for administrator relief as the TFSA over contribution was caused by an honest mistake.
I talked to a senior help desk officer today and explained my situation to her. I became a Canadian resident in 2011 and started contributing to my TFSA in 2012 for both 2011 and 2012. Since the information I could find online stated that the contribution to TFSA started in 2009 and that I could contribute to those years as well if I was over the age of 19. So I thought my total contribution room was $20,000 in 2012 and $25,500 in 2013. I contributed the full $20,000 amount in 2012.
The senior help desk officer told me on the phone that I could not contribute to the TFSA before I became a permanent resident, so that explained the extra $10,000 in my TFSA account. I made a mistake in thinking that I was eligible for the 2009 and 2010 contribution limits. I have contributed an extra $10,000 without knowing that my eligibility to TFSA did not start until 2011. This over contribution carried forward each year since I have been maximizing my TFSA contribution room each year.
I simply misunderstood what I was allowed to contribute. I have withdrawn the $10,000 from the TFSA since receiving the initial letter on Jan 22nd. And since I have continued to contribute to the account in the years following 2012, it will show an excess of money contributed in 2013, 2014 and 2015. That should be solved now since I have moved the money. I have not received a letter from CRA regarding 2014 yet, but I know that I have contributed the maximum amount each year. Please see page 2 for details.
So I would very much like to apologize for this misunderstanding and ask for an administrator relief on the amount I owe.
Thank you so much for your understanding.
We then included a second page with all the contribution history.
TFSA Withdrawal Statement – An Example
As mentioned, we forgot to include proof of our TFSA withdrawal for the excess amount contributed. You should definitely include the evidence with the TFSA over contribution penalty waiver letter to reduce the CRA’s decision making time.
To Whom It May Concern:
RE: Your Tax-Free Savings Account (TFSA)
As per a phone conversation with Sara (1-855-742-1194), I hereby send my TFSA transaction statement to show the contribution of $5,500 and the withdrawal of $10,977.29 from the account after being informed about the over-contribution of $10,000.
Please see attached documents for specific information about the withdrawals.
Thank you for your consideration regarding this case.
Our experience with CRA and TFSA over contribution
When Mrs. T talked to the CRA agent, the agent was quite sympathetic with our situation. She understood it was an honest mistake that compounded itself over the years. The agent also found it odd that we didn’t get informed until three years after the fact. She didn’t go as far as saying that the CRA would forgive us and waive the penalty tax, though. 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 all the information, including the withdrawal statement, I noticed that we got a direct deposit from the CRA for the amount we sent them, plus interest. 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 for the three years. Since they were still waiting for Questrade to provide the 2015 contribution information, they couldn’t waive the 2015 penalty tax. We were informed that we would probably get a TFSA over contribution letter for 2015 and need to plead for forgiveness again.
A few months after receiving the forgiveness letter from the CRA, we received another letter stating that we had been forgiven completely for our honest mistake. This meant we didn’t have to go through the TFSA over contribution process and plead for forgiveness again.
It was quite an experience to have to contact the CRA and plead for forgiveness. The penalty compounded over three years was a significant amount and you certainly don’t want to make the mistake of over contributing to your TFSA.
Therefore, if you have a TFSA, definitely make sure you keep track of your contribution amount, this is especially true if you have multiple TFSAs with different financial institutions.
Dear readers, do you have any experience with TFSA over contributions that you want to share?