What Happens When You Over Contribute A TFSA?

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The TFSA has been around since 2009 and its introduction has created a great way for many investors to make money completely tax free. The fact that money made in a TFSA is tax free could mean that people will try to take advantage of it. So what exactly happens when the TFSA is over contributed? What happens when people try to cheat the rules and make extra money?

Know The Limit, Play Within It

What makes the TFSA so difficult to understand is that like an RRSP account, it has a maximum limit that one can put into the account. What’s been really confusing is that over the years the maximum amount has fluctuated to the point that ordinary Canadians don’t even know what their total limit is anymore.

Quick research; however, shows that if you were 18 in 2009 when the TFSA was introduced, the maximum contributions for the account can’t exceed $57,500 in 2018. What this number means is that you can’t deposit more than that amount into TFSA accounts, but what it doesn’t mean is that the TFSA can’t be holding more than that after capital gains.

This is where people get confused and might over contribute. If gains over the years  have now made the TFSA go over the $57,500 threshold, those gains don’t count against the contribution limit. For some, this means they will lose track of how much contribution they really have left.

As an example,

If you had deposited $40,000 over the years since 2009 and now the value of the TFSA is valued at $65,000, it doesn’t mean that you’ve over contributed. In fact, there is still $17,500 of room left over that can be used up in the TFSA.

If there is any doubt as to how much contribution room you may have left over, then head on over and login to the CRA website to find out. If you don’t have an account. I high suggest signing up for one. The CRA website is extremely helpful in managing your personal finances.

Don’t Cheat The CRA

Some geniuses might think that taking advantage of the tax free gains in the TFSA might be a good idea. So what happens when you try to cheat the CRA and over contribute to invest? There’s just a couple words of advice. Don’t do it! You’re just wasting your time and money.

It might seem like a really bright idea to contribute more money and try to make money quickly in the TFSA. That’s because all gains aren’t taxed right? So what stops you from putting more money than you should, buy some weed stocks that go up after 2 weeks and then sell?

Well, it might seem like a good plan, but the CRA has already thought of this loophole. At no time will you be able to avoid paying taxes on the gains from over contributing. In fact, you won’t even have a gain. The CRA states that any gains from any advantage (over contributing) is fully taxed for the whole amount.

If the holder of a TFSA or a person dealing at non-arm’s length with the holder was provided with an advantage in relation to their TFSA during the year, a tax is payable which is:

  • in the case of a benefit, the FMV of the benefit

This means that if you decide to over contribute and make a capital gain with it, you will forfet the entire amount and get nothing back. Nada! In fact, you will end up paying a penalty to rub salt on wounds.

For example:

  1. You have no room left in your TFSA but decide to put $1,000 in because you have a hot tip on a weed stock
  2. You deposit money in the TFSA and buy the stock
  3. After 2 months the stock is up $5,000
  4. The CRA detects you over contributed and decides to tax you on your gain. Since this gain is from an advantage, you get taxed the full market value (FMV) of the gain which is $4,000
  5. On top of that you over contributed $1,000 for 2 months at 1% interest per month which is $20.
  6. You total tax bill is $4,020

This means for your trickery, the CRA not only took away all your gains, but decides to take another $20 away for your stupidity. This goes to show, never try to cheat the CRA. You’re playing a losing game.

Correct Your Mistake Immediately

If you find yourself in an honest mistake where you over contributed to your TFSA, correct it immediately. Don’t wait for the CRA to tell you that you did something wrong. Just quickly withdraw the money from the account and let the CRA know.

Correcting your mistake yourself will help you reduce any penalties that you might accrue while the money is in the account. Let’s just say that the CRA is not always on top of things, and it could take months for them to detect your over contributions leading to a larger fine. The excuse of ignorance or forgetfulness won’t save you from a CRA penalty. Always try to correct your mistakes as soon as you can.

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