While the number of people mistakenly over-contributing to their TFSAs has been declining each year, the size of individual penalties is likely to grow. This is a consequence of a common type of mistake and growing TFSA balances.
To illustrate the problem, consider our hypothetical hero Joe who dutifully fills up his TFSA every January. Like many Canadians, Joe doesn’t realize that his TFSA can be more than just a savings account collecting modest interest. It’s now January 2020, and after filling up his TFSA yet again he now has $75,000 saved.
Then Joe sees an ad at another bank offering TFSA rates a half percent higher than he’s getting now. That would pay him an extra $375 per year. He decides to take action and withdraws the whole $75,000 and deposits it into a TFSA at the new bank.
Unfortunately, Joe does not do a “qualifying transfer,” which is when the TFSA contents are transferred directly from one TFSA to another without Joe ever handling the money. He just does the transfer himself. “What’s the difference?” you might ask. Qualifying transfers don’t count as a withdrawal and a contribution, but doing it yourself does count as a withdrawal and a contribution.
Those who are familiar with basic TFSA rules will realize that Joe has now made an over-contribution of $75,000. He will be penalized 1% or $750 each month, for a total penalty of $9000 for the year. The catch is that while Joe is allowed to withdraw his money, he’s not allowed to put it back again until the next calendar year (2021).
If Joe had made the same mistake back in 2009 when his balance was only $5000, his penalties for the year would only have been $600 instead of $9000. Anger over the size of TFSA penalties is bad enough right now. Without changes to either the TFSA contribution rules or to the way contributions are tracked to prevent mistakes, anger will grow along with the rising penalties.