Before you make a new contribution to your TFSA you should make sure you have contribution room available to fill. There are 2 ways you can check on what the government thinks your TFSA contribution room is. Perhaps the fastest is to use the Telephone Information System, TIPS. You can also check it using the CRA’s Quick Access system. The best way, though is to track your TFSA contribution room yourself.
What To Be Cautious About When Checking Your TFSA Contribution Room
There is a problem with relying on the government to tell you how much TFSA contribution room you have. The problem is that their information may be out of date. Banks and financial institutions are not required to provide the government with the information about your contribution quickly. In fact, they may not tell the government for months that you put money into your TFSA to buy an investment or make a deposit.
They may also accidentally provide the government with incorrect information. This happened when one discount brokerage accidentally submitted contribution information to the CRA twice, making it seem as if its customers had contributed twice as much to their TFSAs as they actually had.
Keep Track of Your TFSA Contribution Room Yourself
The best way to know your contribution limit is to keep track of your TFSA or TFSAs yourself. Get a notebook or open a spreadsheet file on your computer. Update it each time you make a contribution or a withdrawal from your TFSA.
Keep a running total of how much room (if any) you have left, and how much room you will have on January 1 of the next year (when you can replace withdrawn contributions and when you will get your new annual amount of room.) It’s work but it’s worthwhile work.
Here’s an example of what a spreadsheet might look like:
|Date||Year||New Contribution Room||Contribution Room Because of Withdrawals in Previous Year/s||Total Contribution Room Remaining||Contribution||Withdrawal||Total Withdrawals So Far This Year|
|November 14||2014||0||$3573 ***||$5123|
*** NOTE: You this is the last contribution you can make in 2014. You cannot re-contribute the $5123 until January 1, 2015.
Invest the time in tracking your TFSA limit. It won’t take long but it could save you some serious dollars if you otherwise over-contribute.
What Happens If I Over-Contribute to my TFSA?
The government knew that creating TFSAs was going to create more headaches as people tried to abuse the system for undeserved profits. By 2010 they had set up some pretty strict controls on TFSAs.
If you over-contribute to a TFSA, you will pay a penalty fine of 1% of the over contribution per MONTH every month until the over-contribution is removed.
So, for example, if you over-contribute by $2 000, each month they will charge you a penalty of $20 for each whole or part of a month that the money stays in the TFSA. That’s $240 for the year, or $12% of the money that was over-contributed.
Some people didn’t find this enough of a deterrent. So the CRA also has the right to charge a fine that is equal to the entire amount of income and capital gains earned by the over-contribution.
That’s right. If you invested that $2 000 in a 3% per year savings account, the entire interest earned by the $2 000 would be forfeit and have to be paid to the CRA.
If you invested the $2 000 in shares of a company that tripled in value, every single cent of capital gain, whether you sold the shares or not, would be forfeit and payable to the CRA.
Over-contributing for profit is pointless. Take the money out and invest it in a regular non-registered account. Pay the taxes. You’ll make more money than by trying to game the government.
Shouldn’t My Bank Have to Tell Me I’m Over-Contributing to my TFSA and Stop Me?
You can have as many TFSAs as you want. So a bank or financial institution does not have any way to know whether you have maxed out your TFSA room or not.
Many institutions will flash a brief message on screen reminding you that it is your personal responsibility to ensure you have contribution room. That’s all they will do.
You won’t be able to sue your bank or brokerage if you over-contribute and get fined.
What Should I Do If I Accidentally Over-Contributed to my TFSA?
Accidents can happen. If you over-contribute to your TFSA, remove the over-contribution as soon as possible. Immediately write to the CRA and explain what happened.
- when the money went in
- when the money was taken out
- how much money was over-contributed
- why it happened
Ask for forgiveness. If this is your first over-contribution they may accept your explanation and waive the normal penalties.
Note: If you wait till the last day of the month or the second last before removing your over-contribution, you are weakening your argument that this was an honest mistake. “Mistaken” people do not try to get every penny of profit out of their mistakes: conniving fraudsters do.
- Maximize your TFSA First
- Check Your TFSA Contribution Room Using TIPS
- Check Your TFSA Contribution Room Using the CRA Quick Access System
Have you ever accidentally over-contributed to your TFSA? Were you able to get the mistake forgiven or did you get zinged with a huge penalty? Please share your experiences with a comment.