Friday, June 11, 2010

TFSA Over-Contributions may be Over-Penalized

Update:  I've now checked the TFSA tax calculation for 4 people and only one was incorrect according to CRA's rules.

One Canadian who goes by the handle Ref seems to have discovered a bug in CRA’s calculations of TFSA over-contribution taxes. From Ref’s calculations, it seems that CRA did not give him proper credit for removing excess TFSA contributions and continued applying the 1% tax each month even after the excess was removed. It's not clear how widespread this problem is.

The confusion many people are having with Tax-Free Savings Accounts (TFSAs) is that if you make a withdrawal, you can put the money back, but not until the next year. CRA hits you with a 1% tax each month on any excess amount in your TFSA. But, CRA is supposed to stop charging the 1% tax after the excess contribution is withdrawn according to their RC243-SCH-A form for excess TFSA amounts.

Let’s try a simple example. Sally heard great things about TFSAs and decided to open an account and make a contribution:

2009 Jan. 19: Deposit $5000

Sally has used all her available TFSA room for 2009. However, the next day she found out about a better TFSA account that pays higher interest:

2009 Jan. 20 Withdraw $5000

This gives Sally $5000 of new TFSA room, but not until 2010 when she will have this $5000 plus 2010’s allotment of $5000 for a total of $10,000 worth of room. Not realizing this, she puts the money in her new TFSA the next day:

2009 Jan. 21 Deposit $5000

Sally has now over-contributed by $5000. She will pay a 1% tax ($50) on this over-contribution for January. Sally could have avoided this problem by making an official TFSA transfer rather than a withdrawal and deposit. Sally realized her mistake:

2009 Jan. 22 Withdraw $5000

The TFSA is now empty and according to CRA’s RC243-SCH-A form for excess TFSA amounts, Sally’s tax on excess contributions should stop at $50. However, the method CRA seemed to use to calculate the extra tax for one taxpayer who uses the handle Ref would have Sally paying a total of $600 in taxes because she wouldn’t get credit for the last withdrawal for the months from February to December.

The first clue that something is amiss was the number of people complaining about over-contribution tax amounts exceeding $600, but claiming to have never had more than $5000 in their accounts. Some of these complaints can be found among the comments on this open letter to Jim Flaherty.

Ref produced a spreadsheet to exactly match CRA’s tax demand. Ref modified the numbers a little to protect his or her privacy before sending me a copy. The modified numbers lead to a tax demand of $796, but the actual tax amount owing should be only $367 according to calculation method in CRA’s own example.

Without further confirmation, we can’t be sure that CRA has made mistakes here, or how widespread the problem may be.

I’d be interested in hearing from anyone willing to share their over-contribution tax calculations to confirm whether CRA is doing them incorrectly. I don’t want to see names, SINs, or anything else personal. I’d just like to see the trail of deposits, withdrawals, and the tax calculations. If you’re willing to help, you can send me information at at


  1. Hi Michael:

    Thank you for your work on putting this up.

    I would just like to point to this news release from I felt mislead and misinformed from the start.

    it comes from Ref on another site and I thank him as well for his time.

    Nowhere did it ever say beware, it was all good to go. This in hand with President Chpoice Financial made it a good trap.

    Good luck to all


  2. What the...Is that last comment supposed to be serious?

    Implying that the TFSA's were a trap to make some easy extra tax? Lol!

  3. I've heard many people speculate that this TFSA problem was a planned way to generate extra taxes. I take this to be just an expression of frustration because it just doesn't make sense.

    James (the first commenter) asserted that the TFSA rules combined with lack of oversight by a TFSA provider can become a trap. On this level I agree. However, any claim that the trap is deliberately set I reject.

  4. The following information was just posted on the CRA website at

    The Honourable Keith Ashfield, Minister of National Revenue, and theHonourable Jim Flaherty, Minister of Finance, issued the followingstatement today:

    June 25, 2010—The Government of Canada would like to provide an update onthe recent administrative concerns expressed by some Canadians regardingthe Tax Free Savings Account (TFSA)...

  5. This new "savings initiative" does not even tax you on the interest you gained!!! This would be a good eye opener for us all. No! They tax you on your over-contribution!!! Could they not have hired a computer programmer that would design a pop-up block to WARN you that "YOU HAVE EXCEEDED YOUR ANNUAL $5000 CONTRIBUTION. THANK YOU. HAVE A GOOD DAY!" and logged you off!!??? Could they not have done that!

  6. Here’s my rationale:
    The MAXIMUM TFSA contribution per annum is $5000. With the low market right now between 1% to 3%, the maximum TAX-FREE INTEREST you will get is $150 (at a high 3% interest rate). Now, if you took that money and put it into another savings account, you will be charged interest within your tax bracket. That means that a person who makes $1 million will get taxed ~50%. That is a maximum of $75. This is nothing to a millionaire!!! Usually, millionaires have someone doing their finances and thus won’t make the mistake of OVER-CONTRIBUTION. So, the government will probably not gain anything from them.

    Now, for a poor person like myself, who is struggling to put bread on the table, who doesn’t have an accountant, who UNKNOWINGLY overcontributes $15000, with a NET BALANCE of only $2129, I have to pay over $150 in penalty. This is taxation on money that I have ALREADY been taxed on, not measly $57 dollars interest.

    Now imagine if other POOR individuals, who don’t have the time to read all the fine print, who are struggling to survive, who don’t have a minute to spend with their families, fall into this trap, how much they have to pay in penalties?!!!

    I want everyone to know that I COMPLETELY CLOSED OFF my TFSA!

    This is one of many ways I am going to let the government know how vial and unjust they are!

  7. I can write more about people who have had over $100,000 in OVERCONTRIBUTIONS. Yes they might have made $3000 interest last year, but they now have to pay $12,000 in “penalty” fees. That is $9,000 of there HARD EARNED money going to the government for NO REASON.

    It makes sense now why Steven Harper spend $1 billion dollars last month over the span of a two-week summit in Toronto.

  8. Yes. THIS IS A TRAP. They should just charge tax on earned interest instead of charging tax on principle.