The TFSA account has been by far one of the most popular tax savings vehicles introduced by Jim Flaherty in the 2008 budget. The goal of the TFSA is to allow you to save after tax dollars without being taxed on earnings inside the TFSA. For the purpose of this post, we will discuss the TFSA limit, an over contribution example, and over contribution compliance and fees.
Contribution limits
The government has limited the amount contributed to the TFSA to $5,000 while indexing limit increases based on inflation of $500. From 2009 – 2012 the contribution room of tax free savings accounts has increased by $5,000 each year. In 2013 the TFSA contribution room increased to $5,500. I.e. the $500 increase is accounting for inflation from 2009 – 2012. So, if you were to open a TFSA right now for the first time, you would have a total of $25,500 of contribution room available for 2013.
While the contribution limit in any given year is limited to $5,000, under-contributions can be carried over to future years. For example, if you contributed $3,000 out of the $5,000 in 2011, amounts under contributed will increase your 2012 limit to $7,000.
Below is the Canada Revenue Agency (CRA) definition of the contribution limit:
- the annual TFSA dollar limit of $5,000 (2013 – $5,500)
- your unused TFSA contribution room from the previous year (this amount can be positive or negative); and
- any withdrawals, excluding certain amounts, made from you TFSA in the previous year
Over contribution example
Over contribution to your TFSA can happen in two ways:
- An obvious way is to contribute $10,000 when your cumulative limit is $7,000 in 2012 and therefore you have over contributed $3,000
- A second way which many are unaware off is over contributing by withdrawing TFSA savings and reinvesting them back in the same calendar year. Referring to the example above: say in March 2012 you contributed the full $7,000, in April 2012 you have withdrawn the $7,000 and then in October 2012 you wanted to contribute back $5,000. The $5,000 contributed in October 2012 will be considered an over contribution.
- You will get your limit back the following year i.e. if you have deposited the $5,000 in January 2013 there is no over contribution.
Over contribution compliance and fees
Form RC243-P-E must be filed by June 30 the following year the over contribution has been made. The same form can be used for residents and non-residents of Canada.
The calculation of the over contribution is based on the total of all excess amounts, for the number of months the excess existed multiplied by 1%.
If you do not file a return, CRA will mail you a proposal return, by then you are at risk of a late-filling penalty and interest accruing on all amounts owing. Interest starts accruing from the day the return was due i.e. June 30 of the following year.
If you have over contributed or need more information regarding your TFSA account, remember that we’re you’re trustworthy local Chartered Accountants in Ottawa; do not hesitate to contact us.
