TFSA Over Contributions and Your Tax Bill

Well if you’ve been following the media lately you would have likely seen a few articles/posts on people who got big tax bill because they didn’t understand how their TFSA accounts work.  When you take money out of a TFSA you don’t get your contribution room back until the following year.   So you if put in $5000 to start and then took out $3000 and then try to put back the $3000 in the same year you would be over contributing by $3000 and end up with a 1% penalty per month on the over contribution amount.  If you are in that situation you might have a hope of not paying the tax bill, see this article by Rob Carrick which points out which form you will need to fill out.

I think perhaps people lost sight that this is a savings account and the government what’s to keep people from trying to use it as a chequing account.  They want you to save, not just for next week, but rather next year or longer.  Hence the odd rules.  To be fair about this situation,  the rules were not all that well explained when these new accounts were introduced.

I don’t think I even understood them exactly.  In my case I just screwed up my math and ended up over contributing by $10 to my TFSA because I didn’t check the amount of my last contribution.  I realized this after about two months and then took the over contribution out.  So my tax penalty is a whole $10 x 1% x 2 months = $0.20, so needless to say I’ve not received a letter from the government as the postage they use on the letter would cost more than what I ‘owe’.

Yet what I found particularly interesting was on my notice of assessment it showed my 2010 contribution limit to be $5010.  So if I understand it correctly then my over contribution actually resulted in me gaining contribution room the next year  (actually this was my fault I realized later on…I took out $20, not $10 to fix my overcontribution).  Obviously this just sounds wrong, since if this is correct you should in theory you could ‘buy’ extra contribution room.  For example, you over contribute by $5000 in Nov, then take out the excess in Dec.  Pay your $50 penalty and end up with an extra $5000 in contribution room the following year.

So after reading a little on the government’s TFSA site I think I understand why my $5000 example won’t work.  If you deliberately over contribute to your TFSA, you will likely trigger the ‘advantage’ clause and get nailed with losing that extra contribution room.  Yet based on my own experience there is some grey area, so I wondering if anyone else generated extra contribution room from their ‘screw up’?  If so, how much?  I’m curious to see if there is a set limit or not.

2 thoughts on “TFSA Over Contributions and Your Tax Bill”

  1. I don’t think there’s a grey area. And even if there is, the CRA has been very liberal with the use of GAAR (the general anti-avoidance rule). If you come out ahead, they’ll use this to try and have the tax court smack you down.

    Having said that, if you put in $5000 and double it to $10,000, you CAN take out $5000 and get additional contribution room the next year ($5000, the amount you took out). You’re not buying room, but earning room. There’s no point in taking it out only to contribute it again, since you’ll end up with $10,000 either way.

  2. Robert,

    Good point that the GAAR would be used at the drop of the hat to cover anything they missed.


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