Q&A: TFSA overcontributions

Question: My friend withdrew $5000 from his TFSA and in the same year he deposited $5000 back into his TFSA. He was told by the bank he would have to pay a fine to the Canada Revenue Agency. My question is what percentage is the fine for $5000? I know there is no penalty if you deposit the money you withdrew the following year. – George V.

Gordon Pape answers: If the overcontribution was an honest mistake, the fine is one per cent per month of the total amount in excess of the contribution limit at the start of the year. So if your friend had a $5000 contribution limit when the year began, then the fine is one per cent of $5000 per month or $50. That will continue until the excess is withdrawn from the plan or until he gets enough new contribution room to cover it (at the start of the following year).

The situation can become more complicated when a person makes multiple contributions and withdrawals in the same year. In its Guide to Tax-Free Savings Accounts for Individuals (pdf), the CRA cites the example of a fictional taxpayer named Judy who has a $5000 contribution limit at the start of the year. Over a 12-month period, here is what she does:

January 25 – contributes $4000
March 16 – contributes $1000
June 15 – withdraws $2000
August 23 – contributes $2000
September 8 withdraws $1000

This series of actions results in a TFSA nightmare for Judy. The January and March contributions covered her full allowance for the year. Her June withdrawal will not get added back to her contribution room until the following year so her August contribution of $2000 created an excess TFSA amount for that month. Her September withdrawal of $1000 would be considered a qualifying withdrawal in computing her penalty interest for the following month, October. The excess of $1000 remains until the end of the year and she will have to pay a one per cent tax on it for the months of August to December.

Her total penalty tax works out to one per cent per month on $2000 for August and September, or $40, plus one per cent per month on $1000 for October to December, or $30. Total: $70.

This is why I don’t recommend making multiple deposits and withdrawals from a TFSA each year.

If you find yourself in this situation, you have to file Form RC243, Tax Free Savings Account (TFSA) Return and Form RC243 SCH A, Schedule A – Excess TFSA Amounts.

One more point: If the overcontribution is considered to be deliberate, the CRA will also level a tax of 100 per cent on any profit earned from that money.

Do you have a money question you’d like to ask Gordon? Send it along and then check out our Q&A section regularly to see if it was chosen for a response. Sorry, we cannot send personal answers.