Weekly Tax Tips
Watch Your Timing When Replacing Funds Withdrawn from Your Tax-Free Savings Account
16 Jul 2010
Many individuals have taken advantage of the tax-free savings account (TFSA) introduced by the federal government for years starting in 2009. While you may withdraw money from your tax-free savings account and recontribute that amount to your account, it is important to watch the timing of when you recontribute these funds in your TFSA.
Withdrawals made in a year do not get added back to your available contribution room until January 1st of the following year. As such, if you withdraw funds from your TFSA in a particular year and you have already contributed the maximum amount allowed to your TFSA for that year, you must wait until the following year before you can put the withdrawn amount back into your TFSA. Failing to do so will subject you to a penalty for excess contributions, calculated at 1% per month on the highest amount of excess TFSA contributions in that month.
For example, if you contributed $5,000 to your TFSA on February 1, 2009, then withdrew $4.000 from your TFSA on June 30, 2009 and then re-contributed the $4,000 on August 1, 2009, you will have made an excess contribution of $4,000 to your TFSA for the period from August 1, 2009 to December 31, 2009.
If you find yourself in this situation, you would likely have already received a notice from the Canada Revenue Agency (CRA) to advise you of this and provide you with a calculation of the penalty owed (based on information they have received from your financial institution) and requesting payment of this amount on or before June 30, 2010. If you have not received a notice form the CRA, you can complete and file the following forms provided on the CRA website:
If you still currently have excess amounts in your TFSA, you should contact your financial institution and arrange for the amount of over-contribution to be withdrawn from your account.
Note that a direct transfer between your TFSAs is not considered a contribution or withdrawal and is allowed by the CRA as a qualifying transfer. If the CRA charges you a TFSA over-contribution penalty for such a transfer, it is possible that the transfer was incorrectly recorded by one or both of the financial institutions involved in the transfer and you should contact them to correct the reporting of the transfer with the CRA.
On June 25th, the government provided further information on the process for taxpayers who have overcontributed to their TFSAs. Here are the highlights:
- 2% (or 70,000) of TFSA contributors have been identified as having at least a possible overcontribution.
- The CRA intends to review each situation on a case-by-case basis and, where appropriate, waive taxes on excess contributions for this year.
Two specific mistakes will not be penalized, provided the TFSA balance never exceeded $5,000:
- Where individuals used their TFSA as a regular banking account in 2009, making deposits and withdrawals on a frequent basis, or
- Where individuals transferred funds between TFSAs at different institutions using a withdrawal and a contribution (direct transfers are allowed).
- Taxpayers are encouraged to respond to the CRA letter by providing additional information or explanations they may have in respect to their overcontributions.
- The deadline for responding to CRA letters has been extended to August 3, 2010 (from June 30th)
- The CRA will assess if they are not contacted. Only at that time should the request for taxpayer relief form or a formal notice of objection be used.
To view the original government communication on the CRA website:
http://www.cra-arc.gc.ca/whtsnw/tms/jntsttmnt-eng.html
For further information on TFSAs and the tax payable on excess TFSA amounts, see the CRA website at:
http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/tfsa-celi/menu-eng.html
http://www.tfsa.gc.ca/index.html
This tax tip is a publication of BDO Canada LLP on developments in the area of taxation. This material is general in nature and should not be relied upon to replace the requirement for specific professional advice. The information in this tax tip is current as of 16 Jul 2010.
More Tax Tips Here!
