Are you wondering what happens if you over contribute to your TFSA? So you over contributed to your Tax Free Savings Account, right? Same here, my TFSA over-contribution sent me into panic mode for a few months when I was waiting for their decision of whether or not I will save $450 or be penalized $450 from my TFSA over contribution by the CRA.
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TFSA Over Contribution
Frankly, being penalized for over contributing to your Tax Free Savings Account or TFSA is kind of a nice problem to have, if you think about it though!
#Firstworldproblems, right?
That’s probably not what you want to hear right now though.
I was doing some tidying up and purging in an attempt to get rid of 365 things in one year again, and found an old letter from the Canada Revenue Agency regarding my TFSA over contribution from 2012/2013. It was quite a few years ago but it was definitely a great lesson learned, because now I am very careful now of over contributing to my Tax Free Savings Account (TFSA).
When I got the letter from the CRA I was shocked because I had no idea that I had over contributed because I followed the My Account balances (later I realized that is not accurate). It was stressful.
I immediately tried to call the Canada Revenue Agency (and waited for like, 2 hours I think, to speak to someone) to figure out how to remedy the problem as soon as possible as I didn’t want to get charged for another month since it had been going on for a few months.
Here’s what happened with my TFSA over contribution experience a few years ago and how I went about fixing it.
What Happens If You OVer Contribute to A TFSA?
The reason why I seemingly over contributed to my TFSA was because I had more contribution room since my previous year’s withdrawal was higher than the conventional TFSA room (e.g. I made more money that typical TFSA contribution amounts at that time).
I took money out for a down payment for a house.
I then set about trying to recontribute to my TFSA the year after because it was so depressing seeing such little money in my registered account.
I transferred shares in-kind from a number of accounts and I suppose this triggered what might have seemed like an over contribution to the TFSA.
Related: TFSA Withdrawal Limit: How to Avoid Getting Dinged
The amount of contribution I had when I called Canada Revenue Agency to check was X amount of dollars but it was actually not accurate as it did not reflect transactions I made in the latter part of the previous year.
According to Canada.com
Any contributions that are made or withdrawn from a TFSA in the prior year may not be reflected in your available current year contribution room until after the end of February. All issuers have until the last day of February to electronically submit a TFSA record to the CRA for each individual who has a TFSA. Any transactions made in the current year will not be included.
See, I didn’t know about this February TFSA reporting business when I tried to see what my contribution room was.
This won’t happen anymore because I have a routine now.
Every January 1, I just deposit the full eligible amount into my TFSA (these days it is $6000 but that depends often on the government flavour of the month).
No more guessing how much contribution room I have and wondering if I did an over contribution to the TFSA.
Related: 6 Ways to Invest your TFSA
The TFSA Over contribution Penalty
What is the TFSA over contribution penalty?
The TFSA over-contribution penalty costs 1% of the excess amounts calculated per month that the excess amount existed.
So in layman’s terms, you take the amount that you over contributed, and figure out what 1% of that is, and then multiply it by the number of months that you were unaware of this TFSA over contribution problem until you receive a letter from the government.
While there isn’t an automatic TFSA over-contribution penalty calculator, you can easily calculate it yourself. Since the TFSA contribution penalty is 1% of excess amounts per month, you can come up with the numbers for your own situation in a straightforward way.
For example, if you over-contributed by $5000, then you will be charged $50 a month that the excess amount occurred.
So if you over contributed by $5000 in January, and you didn’t find out about your excess over contribution until September you will be charged $450 even if you paid off the over contribution penalty in September.
How to Fix a TFSA Over Contribution
Rest assured, it is not too difficult to fix a TFSA over contribution, even if it sets you off into panic mode when you first get the over contribution letter.
First off, to fix a TFSA over contribution, give the folks at the Canada Revenue Agency a call.
The customer service representative that I talked to was very kind and helpful. It was a year when there were a lot of TFSA contributions because it was so new (2013).
You want to get a TFSA over contribution appeal.
To get a TFSA over-contribution appeal, there are a few steps after you withdraw your TFSA over contribution.
They will ask you for a formal letter of objection explaining your contributions and writing out line by line the TFSA transactions that have occurred.
This is called a TFSA over contribution penalty waiver letter. Some people have had success using a form called the rc4288 (This form is called Request for Tax Payer Relief)
I had to contact my TFSA issuer (Questrade) for a line by line transaction summary of my TFSA contributions (they will have a record of this since they submit this to the government for every TFSA).
Related: Step-By-Step Guide on to Invest your TFSA with Questrade
You will still have to pay the over contribution penalty by cheque, and after this is dealt with (and your plea has been approved), they will issue you a cheque in return with the amount you paid. If you do not submit a cheque along with your letter, they will start charging you interest.
After writing the TFSA over contribution penalty waiver letter and mailing it to the TFSA processing unit in Ontario (or Manitoba), then you play the waiting game.
After a few months you will get a reply accepting or denying your request.
From what I heard from the customer service representative I talked to, most people are approved and refunded their money, but it just takes some time.
This was the case for my situation.
Here are the addresses of the CRA TFSA contact or TFSA Processing Units, according to Canada.com
Canada Revenue Agency
TFSA Processing Unit
Sudbury Tax Centre
PO Box 20000 Station A
Sudbury ON P3A 5C1
Canada Revenue Agency
TFSA Processing Unit
Winnipeg Tax Centre
PO Box 14000 Station Main
Winnipeg MB R3C 3M2
TFSA Over Contribution Penalty Waiver Letter sample
Here’s an example of what I wrote back in 2014 to the CRA to plead my case, here’s a letter sample of the TFSA over contribution penalty waiver request.
To Whom It May Concern (TFSA Processing Unit):
Please accept this letter as an explanation of my contributions to the TFSA because although I submitted payment for the excess contributions, I do not agree with it and I would like to have my situation reviewed.
Please see attached documents for statement details regarding the transactions.
[List detailed TFSA transactions, you might want to use the RC343 worksheet]
Please reconsider my TFSA over contribution penalty as I have exercised caution and care consideration, reviewing the My Accounts page before contributing to my TFSA.
Sincerely,
Weary Canadian Tax Payer
How to Prevent a TFSA Over Contribution
Now that you know the TFSA over contribution rules, the you can prevent a future TFSA over-contribution.
To prevent a TFSA over contribution, the best way (in my opinion) is to know your TFSA contribution room like the back of your hand.
In my opinion, to do this, it is best to contribute the lump sum amount for your TFSA at the of beginning of the year, so you can forget about it for the rest of the year.
You have to know your TFSA lifetime limit first.
The other option is that you can have automatic transfers throughout the year (e.g. $6000 divided by 12) so that it is automatic and there’s no guessing or calculating involved. Even numbers are best and it is optimal not to transfer in kind with your non-registered shares.
To prevent a TFSA over contribution in the first place, you have to know your TFSA contribution limit and your total TFSA contribution room. Knowing your TFSA lifetime limit is also very helpful.
If contributing a lump sum at the beginning of the year is not preferable and you’re in a muddle like I was to know exactly where you start (and what TFSA contribution limit you have), you can always log into the Canada Revenue Agency “My log in” and click on the button that says TFSA under “my accounts”.
This will tell you how much TFSA contribution room you have in the first place. The TFSA contribution limit total or TFSA lifetime limit is easy enough to figure out if you’ve never contributed, but if you have taken money out and put money back in like me, it can get confusing.
A caveat, the TFSA contribution room for the current year is not updated right to the present year though, in my experience.
Hopefully this helps you figure out what to do if you made the faux pas of over contribution to your TFSA. It’s probably not as prevalent as it was over five years ago, but just in case it happens to you, hopefully this post helps you realize that you aren’t alone!
Related: TFSA vs RRSP: Which One to Invest in First
TFSA Limit (2022)
Here’s the TFFSA limit for 2022 if you were of the TFSA age limit in 2009 when it was first introduced and you had never contributed until this year.
The TFSA limit for 2022 is $81,500.
| Year | TFSA Contribution Room |
| 2009 | $5000 |
| 2010 | $5000 |
| 2011 | $5000 |
| 2012 | $5000 |
| 2013 | $5500 |
| 2014 | $5500 |
| 2015 | $10,000 |
| 2016 | $5500 |
| 2017 | $5500 |
| 2018 | $5500 |
| 2019 | $6000 |
| 2020 | $6000 |
| 2021 | $6000 |
| 2022 | $6000 |
| 2023 | $6500 |
| Total | $88,000 |
TFSA Over-Contribution Recap
Okay, to summarize, here are the steps of what to do if you find that you over contributed to your TFSA.
- Don’t panic, and remember to breathe
- Calculate your TFSA over-contribution with the TFSA over contribution form, it is typically 1% for the total over-contributed amount multiplied by the number months that it is over the TFSA limit
- Call the CRA (Canada revenue agency) TFSA Contact
- Draft up a TFSA over-contribution letter (remember to explain all of your TFSA transactions, you could use the TFSA over contribution penalty waiver letter sample above)
- Mail the letter to the TFSA processing unit
- Prevent a TFSA over-contribution in the first place
You may also be interested in:
- RESP Contribution limit
- Tax Filing Software in Canada (Free)
- RRSP Contribution Deadline
- Paying CRA Taxes with a Credit Card
Have you ever had a TFSA over contribution before? How much was your TFSA over contribution penalty?
GYM is a 30 something millennial interested in achieving financial freedom through disciplined saving, dividend and ETF investing, and living a minimalist lifestyle. Before you go, check out my recommendations page of financial tools I use to save and invest money. Don’t forget to subscribe for blog updates, a free dividend yield spreadsheet, and the free Young Money Bootcamp eCourse.
Yikes! You must have been vexed at having this expense for ‘saving too much’. Great article! I’ve read everywhere about ensuring you don’t over contribute. But nowhere about what to do if you accidentally do put too much in your TFSA.
@Kari- Yeah, it was stressful, but as Sherry says, #firstworldproblems I’m not sure if they would be as forgiving now, after all, it has been out for a few years now, but these are the steps I took when I over contributed.
You know. I do this so often. Like ridiculously often… I’ve learned to just not put any money in until I get my notice of assessment and THEN I check the TFSA. #FirstWorldProblems
@Sherry- Glad I wasn’t the only one. It’s hard to keep track, that’s why I try not to take any money out of my TFSA now.
I contribute the full amount as early as possible(Jan. 8 this year) and make clear record of it(yes, I love spreadsheets!) Glad you got the money back.
@jimmbboe- Good idea to use a spreadsheet!
There is a part of me that is like man, I wish this was a problem I was at risk of having (between paying back debt now and having a TON of room from not contributing for many years, I don’t anticipate this is a thing I will be dealing with any time soon)
But then the other part of me — the part of me that really, really dislikes dealing with the CRA — is like ugh no thanks. I will never forget the HASSLE of trying to send back the GST cheques they kept sending when Mr. OBP and I got married. Sigh.
Now all that said, when we are in a position to really start contributing, I’ll definitely be doing what you suggest and doing a lump sum at the beginning of the year. Not sure when exactly that will be possible for us, but boy, am I ever looking forward to it!
I’ve never had that issue, but sometimes I think saving/tax rules are over complicated. They can scare off the average person trying to save for their future. Tom
@Tom- Good point, very wise words as usual, Tom.
If you want a horror story, I was assessed with $6,700 in penalties after we had deposited my wife and I’s limits into one account and only found out about it after an NOA 18 months later. CRA wouldn’t help me now I have to go to federal court :Z
@Danio- Omg, that is a horror story. That is something so easy to do especially with the ease of online deposits into your TFSA accounts, that’s too bad the government won’t let this simple mistake go!