Avoiding penalty taxes on your “Truly Fantastic Savings Account”

April 10, 2014

By Sheryl Smolkin


For the last five years all Canadians over 18 have been eligible to open a “Truly Fantastic Savings Account” (aka a Tax-free Savings Account). These accounts are a particularly valuable retirement savings option for lower-income people who will not be taxed at a reduced rate after retirement and more affluent Canadians who have used up all of their RRSP contribution room. 

You can open a TFSA at age 18 even if you are not earning income, as long as you have a social insurance number. TFSA contributions are not tax-deductible, but investment earnings accumulate tax-free. You can also continue contributing to a TFSA beyond age 71 when RRSP contributions must end.

According to the BMO Annual TFSA Report released in late December, almost half of Canadians (46%) now report having TFSAs – up 23% from 2012. However, one-third of account owners are still not fully familiar with how TFSAs work. As a result, since opening an account, one in 10 people have over-contributed and paid a tax of one percent per month on overpayments.

To avoid a penalty tax, you must understand how much you can contribute each year, the way unused contributions are carried forward and when withdrawals can be replaced.

Starting in 2009, TFSA contribution room accumulates every year even if you do not file an income tax return or open a TFSA. The annual TFSA dollar limit for the years 2009, 2010, 2011 and 2012 was $5,000.The annual TFSA dollar limit for the years 2013 and 2014 is $5,500.

The TFSA dollar limit is indexed based on the inflation rate. The indexed amount will be rounded to the nearest $500.

Investment income earned by and changes in the value of TFSA investments will not affect your TFSA contribution room for the current or future years. For an example, if you earn $1,500 in interest on your 2013 balance, you can still contribute $5,500 in 2014.

The TFSA contribution room is made up of:

  • Your TFSA dollar limit ($5,500 per year beginning in 2013 plus indexation, if applicable);
  • Any unused TFSA contribution room from the previous year; and
  • Any withdrawals made from the TFSA in the previous year.

The mistake that many people make is to withdraw funds and re-contribute them in the same year, after they have made their maximum contribution for the year, thus triggering an overpayment.

For example, assume that at age 18 in 2011. Jane opened a TFSA. At the end of 2012, Jane had contributed $10,000 to her account and had used up all of her 2011 and 2012 contribution room.

  • In January 2013 she contributed the maximum amount of $5,500 for the year.
  • In March 2013 Jane withdrew $10,000 to buy a new car.
  • In September 2014, using her annual bonus, Jane re-contributes $10,000 to her TFSA.

Jane will have a $10,000 over-contribution that will be taxed at 1% per month until the end of 2013. To avoid triggering the tax, she should have waited until the next year (January 2014) to pay back the money she withdrew from her account in 2013.

Your TFSA contribution room information can be found by going to one of the following services:

If the information that CRA has about your TFSA transactions is not complete or if you have made contributions to your TFSA this year, use Form RC343, Worksheet – TFSA contribution room, to calculate your TFSA contribution room for the current year. If CRA has deemed your unused TFSA contribution room to be a specific amount and you believe it is incorrect, instead of using this form, contact CRA for more information.

So keep records about your TFSA transactions to ensure that you do not exceed your TFSA contribution room.  CRA will also keep track of your contribution room and determine the balance of room at a particular time for each eligible individual based on information provided by TFSA issuers.

Also read:

TFSA Infographic

BMO Annual TFSA Report

Misunderstanding this simple TFSA rule could cost you a lot

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