At the beginning of March 2013 a person posted to RedFlagDeals that they had received a letter from the Canada Revenue Agency advising them that they had contributed too much to their TFSA in 2011 and that they owed a large fine to the tax department. The investor knew they had not over contributed and started immediately checking into the problem. The error was made by Questrade. Apparently, due to a computer system change, some contributions were reported twice to the CRA. For example, investors who had contributed $5000 were reported as contributing $10000. This led to massive confusion.
This problem is also discussed on the Canadian Money Forum.
What is the Penalty for an Over Contribution to a Tax Free Savings Account?
When TFSAs were first introduced in 2009 all sorts of people immediately started trying to test the system to maximize their profits and minimize their taxes. The CRA set up a penalty for people who contributed too much to their TFSA. That penalty was set at 1% of the amount of extra money deposited in the TFSA per month! So if an investor contributed an extra $1000 they would owe $10 a month for each month the over contribution stayed in the TFSA. That means for a year, the penalty would be at least 12%, a cost much higher than the average benefit of investing.
This 1% is charged based on the highest over contribution during a month. So if you invested $5500 too much on, say, January 1, and removed it on January 3, you would still owe the $50 penalty for that month.
Isn’t It Worth Cheating and Contributing Too Much to a TFSA Even with the Penalty?
The investor will also owe taxes on any money earned by the over contribution. So there is no benefit to over contributing. You might as well invest it outside of your TFSA and pay the tax on any earnings. It’s cheaper than investing it in the TFSA, paying the 1% per month penalty and STILL paying the tax on any earnings.
You can check the Canada Revenue Agency website for examples of taxes and penalties payable on over contributing to a TFSA at http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/tfsa-celi/txtn/xcssxmpl-eng.html#xmpl3 and the tax form for reporting tax owing as a penalty and as regular tax (Advantage section) on income http://www.cra-arc.gc.ca/E/pbg/tf/rc243/rc243-12e.pdf .
The Questrade Error Is Being Resolved with the Canada Revenue Agency
The Questrade error appears to have only affected contributions made between January 1 and February 4, 2011 based on information discussed by clients on RedFlagDeals.
What Should You Do If Questrade Reported Your Contribution Twice?
Questrade will be sending a corrected version of the information on contributions to the CRA.
Some investors, however, have decided to document the problem with the CRA TFSA Processing Unit. They have sent letters detailing what they contributed and when.
Where Should I Send My Explanatory Letter to the TFSA Processing Unit of the CRA?
The address reported on the CRA website is
TFSA Processing Unit
PO Box 9768 Station T
Ottawa ON K1G 3X9
However, the CRA has reported that it is unnecessary to call or write them at this time as Questrade has advised them of the problem and that it is sending a corrected information file as soon as possible.
You Can Check Your TFSA Contribution History on Line
It’s actually possible to check what the CRA thinks your TFSA contributions have been by using the Canada Revenue Agency website using My Account or Quick Access, or from TIPS the telephone information system. The Tax Information Phone System will only tell you the amount of unused TFSA contribution room as of January 1 of the current year.
UPDATE: Questrade Errors Fixed
According to posts on Redflagdeals.com, the correct information has been supplied to the CRA by Questrade and the corrections have now been implemented. As of April 24 2013 and onwards several forum users have reported their errors have been fixed and the CRA My Account feature now has the correct information for their contributions to TFSAs at Questrade.
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